Update: On 8 April 2016, Fu Yu Corporation has announced that it has decided on adopting a dividend policy of declaring and proposing at least 50 percent of its profit after tax attributable to the owners of the company as dividends, unless:
- Any reinvestment of the profit for capital expenditure, expansion or diversification purposes is more that 50 percent of the profit; or
- There is insufficient profit at the Company level; or
- There is insufficient funds at the Company level to pay for the dividends.
In their FY15 results released recently in February, we see that Fu Yu Corporation (Fu Yu) currently holds $102.9 million in cash and cash equivalents, representing a massive 71.6 percent of its market capitalization, which stood at $143.8 million as of 4 April with a closing price of $0.191.
Fu Yu is involved in the manufacturing and selling of precision plastic moulds and plastic components, as well as the manufacturing of plastic, aluminium parts, electronics products for various industries such as medical, telecommunications, electronic appliances and automotive.
Investors should also note that Fu Yu’s share price has been on a rally for the past month and has been up 20.1 percent from its share price of $0.159 as of 4 March.
Over the years, Fu Yu has also been able to reduce its debt gradually and in FY15, they have zero debt on their balance sheet, further contributing to its stellar balance sheet performance.
The 7.6 Percent Dividend Yield
With a hoard of cash on hand as well as an impressive ability to generate $27.9 million free cash flow for FY15, we come to the favorite part of many investors, Dividend Yield.
Due to the fact that Fu Yu was not doing well and reported net losses prior to FY13, they only started distributing dividends in FY15. In FY15, Fu Yu declared a total dividend of $0.015 per share, representing a dividend yield of 7.6 percent according to 4 April’s closing price of $0.191, with a payout ratio of approximately 80 percent.
As mentioned, Fu Yu’s stock price has been on the rise for the month, using the closing price of $0.151 on 4 March, its dividend yield actually stood at a whopping 9.9 percent.
However, not all is perfect with Fu Yu. Looking at their income statements over the years, investors might frown upon the consistently decreasing revenue that the group has been receiving. In FY15, revenue dropped 12.6 percent to $222.5 million, and over the past five years, revenue CAGR stood at a negative 3.15 percent, citing reasons such as the slowdown of their China segment, which saw a significant decrease in orders as well as reduction in contribution from its Malaysian segment as a result of reduced orders and depreciation of the Malaysian Ringgit.
Nevertheless, the group was able to achieve increasing profitability due to its aggressive cost cutting measures implemented in recent years. Through major right-sizing and cost cutting exercises such as introducing more automated processes, as well as streamlining more manufacturing processes, the group was able to cut its costs significantly.
For FY15, the group reported a 16.3 percent cut in their cost of revenue, and over a 5 year period, cost of revenue CAGR stood at negative 10.1 percent, which is more significant than the fall in revenue, resulting in increased profitability.
No Share Consolidation Expected
The management of Fu Yu has also indicated that more dividends are likely to be given as long as retained profits and profits generated can support the payout. Furthermore, they have also expressed their intention to meet the minimum trading price of $0.20 set by the Singapore Exchange without exploring the option of share consolidation.
Furthermore, Fu Yu currently owns a 70.64 percent stake in Bursa-listed LCTH Corporation, which is involved in a similar industry and exudes similar traits to that of Fu Yu.
LCTH Corporations’ FY15 results exhibited the exact same trend as Fu Yu, with decreasing revenue received but increasing profitability due to aggressive cost cuttings. Similar to Fu Yu, LCTH Corporation is also a cash cow by itself with cash holdings of RM101.8 million which represents approximately 50 percent of its market capitalization, free cash flow generation of RM12.7 million and zero debt for FY15. With performance for LCTH Corporation expected to improve in the future, the contributions made to Fu Yu would increase significantly as well.
With an average street price of $0.30 for Fu Yu, it represents a 57.1 percent upside from the closing price of $0.191 as of 4 April. With cost-cutting expected to continue, margins can likely maintain or further improve and we strongly believe Fu Yu is in a great position for investors to consider including into their portfolios to tap on its massive cash position as well as high dividend payout.