Superhero strength and superhero cash generating abilities best describe Fu Yu Corporation ("Fu Yu"). Fu Yu is a business listed on the Singapore Stock Exchange focusing on fabrication of precision moulds as well as sub-assembly of precision plastic parts and components. The Fu Yu Group of companies have non-existent bank borrowings on the face of their statement of financial position. Yes.....this is not a typo error...zero borrowings from the bankers. It is even sitting on a cash hoard of over S$98.4Mil as at Q1 2018 which was built up over the years. This represented an impressive translation of S$0.131 cash value per share. Its share price is around S$0.18 per share. Hence 66% of its market value is directly supported by the fair value on its mammoth cash position. It was also giving out over 8% in dividend yield in the previous years.
I mean that this is no simple feat considering that Fu Yu is in the business of manufacturing and having to deal with complexities such as marketing & business development to maintain the top-line, maintaining the technical edge in manufacturing competencies, sorting out raw materials purchases, review of manufacturing process cost control, managing overseas plants and human resources in Malaysia & China and dealing with very competitive rivals. Also having to deal with macro economic climate and cyclical demand for their products requires lots of versatility.
Based on my past few years of observation, I have to conclude that Fu Yu has a very good senior management team in place and well helmed by their current Board of Directors. The core senior management team is very important for such a business as they determine how the business should response to current economic environmental challenges and also to determine the future strategic business development. The operational teams at the ground level will then implement and execute in accordance with the business unit leaders requirement. Hence the current talent pool throughout the entire Fu Yu organisation are definitely one of the very best in their respective fields.
The question will be whether Fu Yu can continue to grow its revenue and maintain its dividend pay out to its investors.
Review of Financial and Operational Performance of Fu Yu Corporation
2017 was not a good financial year for Fu Yu. Its revenue dropped drastically in the face of competition and general lower demand in the market.
I have included a revenue, gross profit and net income trending chart from 2012 to projected 2018 (based on simple annualisation of Q1 2018 results).
The blue line represents Total Revenue and has been on a declining trend since 2012. The interesting thing to note is that the Gross Profit line have not declined drastically in line with the drop in Total Revenue. Gross Profit Margin % have in fact improved over-time.
Saying that, the downward revenue trending for Fu Yu is worrying as it may indicate that the Group is no longer competitive or there are major disruption in certain market segments. To address this concern, we need to further delve into quarterly revenue being generated. A snap shot and deep dive into the revenue, gross profit and net income trending by quarters (using past 3 years data) as per below:
The Q1 2018 announcement has stated that revenue is higher than the previous Q1 in 2017. There are some retail investors who heralded this as evidence that Fu Yu has successfully overcome the downtrend and is on an expansion path again. However, I would urge caution against such train of thoughts as the revenue is still showing a drop against the most recent Q4 2017.
Next, we will need to examine what the Management of Fu Yu is doing to steer the organisation forward amidst the current economic climate. In the Q1 2018 announcement, Management has listed down various key strategic initiatives.
Basically, to drive sustainable growth, Fu Yu management has channeled business development resources and efforts on the following strategic initiatives:
(i) strengthening its business development team to expand market share with existing customs and make inroads with new customers (this includes embarking on digital marketing platform);
(ii) diversifying its customer base across different targeted market segments to ensure greater business stability;
(iii) focusing on products that have greater stability, longer life cycles and higher growth potential such as medical, automotive, green & security-related products and 3D printers; and
(iv) continuously improving its operations to achieve optimal capacity utilisation, high production efficiency and leaner cost structure.
The better results against prior year seems positive and encouraging. Once we have the upcoming Q2 2018 results (for half year ending 30 June 2018) released, investors will have a more concrete financial information to make a better assessment on whether the business strategies are bearing fruits to re-vitalise revenue generation.
Sustainability of its generous dividends pay out
The super impressive S$98.4 Mil in cash and bank balances is testament to the strong cash generation capabilities of the core businesses. Even though the revenue has declined over the last 2 years, the business remain profitable.
Due to the aforesaid mentioned above, there is no problem for Fu Yu to meet the cash dividends if management choose to maintain an 8%++ yield. In the absence of any surprised economic downturn or Merger and Acquisition target, the huge cash balances on hold is non-productive for Fu Yu and it makes more sense to try to return as much of it back to shareholders.
The funding required will only be in the region of S$9.9Mil extra out of previous Retain Earnings per year even if the results remain flat as at Q1 2018. This will be peanuts relative to the S$98.4Mil in cash on hand and bank.
If the management became unreasonable and are only willing to return 100% of current year profit (and refused to utilise past Retain Earnings), then based on annualization of Q1 2018 earnings per share, the dividend yield will drop to 1.56% for FY2018, assuming a price of S$0.18 per share. However, we can see that for May 2018, management of Fu Yu had already declared a dividend of S$0.01 which is already a 5.5% dividend yield.
In addition, another possible scenario is assuming a worst case of sudden economic downturn (Italy and EU melt-down spread to Global Economy), the dividend payout may be reduced drastically or even nil. But the size of the current cash on hand and in bank will be able to tide Fu Yu over and ride out the storm. The low CAPEX and a seasoned senior management team will be able to effectively slash the cash burn rate to conserve cash for survival mode in the circumstances as it is.
Valuation of Fu Yu against current market price of S$0.18 per unit (as at end May 2018)
On the subject of valuation, this becomes an extremely subjective and judgmental issue which depends on investor outlook based on the best information available at this juncture.
On one hand, one can assume that the good old days for Fu Yu are over and the revenue will decline until the business went into the red for many years and eventually bled out. In this extreme case, the valuation will of course be near zero.
However, my personal thoughts are that based on the proven management team as well as the excellent financial track records of Fu Yu, the probability of upside are extremely high for those who choose to invest into this business. Fu Yu should be able to maintain a decent level of profitability barring major economic catastrophe on a global scale. There is also the distinct possibility of other bigger MNCs targeting Fu Yu for takeover to achieve further competitive advantage via the theory of economies of scale which surely will boost the current market value, Personally I thought its current market price is on the lower end of its intrinsic value (Net Tangible Assets per share are S$0.22 + pure cash making up S$0.131 or 66% of its current market valuation and high probability that the business will be able to make a decent profit or at least breakeven from proven track records of its cash generation ability for the next few years).
No comments:
Post a Comment