Superhero strength and superhero cash generating abilities indeed best describe Fu Yu Corporation ("Fu Yu Corp"). Earlier this week, I was surprised to see that Fu Yu Corp stock price has shot up by 40% relative to my average entry purchase price of S$0.205. Turns out that the trio co-founders has sold off the majority of their stakes to a private equity fund. The co-founders have sold off 29.8% of their stakes, around 224.4Mil shares of Fu Yu Corp, for S$58.3Mil to local fund management firm, Pilgrim Partners Asia. This works out to a valuation of S$0.26 per share.
1. Is Fu Yu Corp overvalued at S$0.290 given last major sales is at S$0.26 per share? Time to sell?
Based on net assets per share, it is showing S$0.217 as per the recent announcement. However, there was an analysis report by UOB Kay Hian which had interviewed the management then to reveal that the leasehold properties were recorded at historical value convention. The fair value upside is around S$50Mil. Hence this will give an adjusted net assets per share at S$0.284. Current market price is around S$0.290 as at 21 January 2021, which thus suggest some slight overvaluation by the market.
If we are looking at earnings multiples, the current EPS of S$0.0169 per share means that market price is at 17 times of earnings. Historically, this has been around 12 times. Therefore, from earnings multiples perspective, current market price seems overpriced.
The 3 directors who sold off their majority stakes have went into sudden retirement. There is not much information on the new directors taking over the founders except that they were of banking background and can add value to business development via their vast banking network. I am actually quite worried as no one seems to have manufacturing background. In terms of operations, will the new directors be as experienced and nimble as the trio cofounders in knowing exactly when and how to react fast taking into context the macro-economic situation via scaling up and scaling down production operations? Timing is essential in this business else the business will be bleeding profusely non-stop.
I have dropped a note to the Investor Relations team to be more transparent and release more information on the background of the new directors other than formerly from "banking" and full stop.
3. Dividend yield.
Fu Yu Corp has declared a final dividend of S$0.01 per share. This brings the total dividends given for FY2019 to S$0.016 per share. This is a dividend yield of 5.52% and a payout of 95% of earnings for the year. The key question as per point 2 as aforesaid mentioned will be can the new directors maintain such excellent results?
Summary
As per above mentioned points, it does not appear to be very attractive anymore to hold long term stakes in Fu Yu Corp given the recent run up in price. It seems now more reasonably valued albeit on the high side. Not sure on the new management team's plan in place but I am worried over the experiences of the new directors. In the absence of further disclosure of strategic future plans of the new team, I have taken out the unrealized profits by encashing approximately S$10K earlier this week for re-deployment into other stocks. But have retained around two-third stakes in Fu Yu Corp. Good attributes of Fu Yu Corp will be zero leverage and high cash balances in its financial position. The payout of 5.52% is also still decent.
Please also refer to my previous posts on Fu Yu Corp:
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