Fu Yu Corporation- Super Hero Cash Cow New Growth Path- To Expand Operations Capability in Singapore

Share price of Fu Yu Corp has surged by 52% relative to one year ago. The main reason for the sudden spike in January 2020 was due to the announcement of the redevelopment of its 7 Tuas Drive premises. Fu Yu Corp is embarking on a drive to expand and improve its operations in Singapore through the construction of a larger building to house a factory, warehouse and office space. 

1. Fu Yu Corp retained too much cash on its balance sheet which are none productive- Good and Bad

As at 30 September 2019, total cash on the balance sheet was a staggering sum of S$84.6Mil which is S$0.112 per share. The good point is that based on market price of S$0.285 as at 17 January 2020, this means that 38.8% of Fu Yu Corp fair value are being backed up by physical hard cash. The bad point however is that most of these cash are underutilized and none productive. 

The redevelopment and expansion plan actually come across as a pleasant surprise for me. The excess cash are now being reinvested to boost production capability and also to improve productivity. 

These are definitely worthwhile and value adding to the business and shareholders. Fu Yu Corp intended to fund S$15Mil of the entire projected capital expenditure from internal funds.

2. Debt Free Balance sheet

Fu Yu Corp does not have any bank borrowings at all on its balance sheet except for some lease obligation being capitalized upfront as part of the change in new accounting standard on application of the “Right of Use” model for operating leases. The current cash pool will provide a relatively high margin of safety for Fu Yu Corp and its seasoned senior management team to weather any sudden economic downturn. 

3. Is there any further potential upside in Fu Yu Corp’s share price?

Yes. Ever since the announcement of the redevelopment of the Tuas premises, analysts have been busy re-rating the target price. The most optimistic target price was set by DBS Research of S$0.350 per share which is another potential 20% capital appreciation. I believe this is likely in the long run given that Fu Yu Corp has been booking in its owned properties at cost. This represented a further estimated S$50Mil revaluation gain in fair value for its properties that remains hidden. 

Summary and other thoughts

Even though my average entry price for Fu Yu Corp is approximately S$0.192 per share (48% capital gain), I think that now is still not the time to sell Fu Yu Corp. Hidden intrinsic value such as those from its properties can be further unlocked if there is a buyout by potential suitors. 

In addition, I strongly believe that Fu Yu Corp is an attractive target for M&A given its new medical industry and automotive customers’ exposure. At the current market price of S$0.285 per share, Fu Yu Corp is still giving out an annual dividend yield of 5.5% with upsides from the business expansion as well as productivity cost savings from high tech machinery being purchased. Therefore, one can continue to wait for future M&A offer and at the same time, get part of the earnings realized from dividend declaration by Fu Yu Corp. 

Please also see my previous articles and write-up on Fu Yu Corp

(i) Fu Yu Corporation- SUPER Hero cash generating abilities

(ii) Fu Yu Corp- Good Performance For FY2018 And Sustainability Of 8% Dividend Yield

(iii) Fu Yu Corp Super Hero Cash Generating Abilities Strikes Again-Returns 100% Profits As Dividends to Loyal Shareholders