Tuesday, March 24, 2015

Fu Yu

Fu Yu: Market Insight highlights the compelling stub valuation of the precision parts manufacturer, with special attention paid on its cash pile.

Based on its latest FY14 financials, Fu Yu is currently in a net cash position of $82.0m, representing 10.9¢ per share. This means that at its last traded price of 11¢, almost 100% of the group’s market cap consists of cash.

A look at its financials, reveal that Fu Yu was loss-making for several years before turning profitable in 2012. In its recent 4Q14 results, net profit came in at $5.4m (+34.5%), taking FY14 earnings to $10m (+49.9%).

Despite a 10.2% drop in FY14 revenue to $254.4m, gross margin improved 5ppt to 12.2%, due to its focus on high margin projects. Meanwhile, its new Chongqing subsidiary started production in 2Q13, which has enhanced its operational efficiency.

While more conservative investors may prefer to wait for another year before confirming the group’s turnaround story, Market Insight believes that given the group’s cash hoard, an investor will be getting almost all its manufacturing and sub-assembly businesses for free.

Ascribing a very conservative 3x FY14 P/E multiple to the group’s current earnings base, and adding on its cash hoard, could give Fu Yu a fair value of at least 15¢, implying a 36% upside from current prices.

As such, Market Insight is adding the stock to its value portfolio with an entry price of $0.11.

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