In a bullish market environment, it is often difficult to find companies that provide a long term value with a sufficient margin of safety to shareholders. Because of such difficulties, we often see investors pumping up their investment in commonly seek blue chip companies that pushes its price to earnings to record high these few years.
However, this stock that I will be highlighting shortly is currently trading at a massive discount. In fact, they are trading at less than what the cash value is worth on their books. I will be explaining in further detail later.
The company mentioned is Fu Yu Corporation.
To give a little bit of the background, the company was started in 1978 and listed in the SGX in 1995. The company is in the business of moulding, fabrication and assembly and they are a pioneer in the major plastics manufacturer. I will not be doing a thorough review on the company’s foundation at this moment as this is only a preliminary review at the start. Should you be interested to explore further, please conduct your own due diligence on the company.
The company reported its full year 2014 results recently on the last day of February.
Balance Sheet Strength
On their balance sheet, the one thing that stands out is their huge cash and cash equivalent balance which amounted to $83 million, which is equivalent to 11 cents / share. The current share price is trading at 10.8 cents / share, which is already a discount to what they have for the cash on their book.
The company has also positive net working capital excluding cash. This means that current assets (excluding cash) are able to cover the provision for current liabilities, mostly through their trade receivables.
The other thing which stands out on their balance sheet is the zero (or very minimal) borrowings they have. With an impending interest rate increase, the non-leverage factor is definitely a plus to have on any company’s book right now.
The NAV of the stock is currently at 23.23 cents / share.
Sign of Value or Trap?
With such a strong balance sheet, you wonder why the company is trading at such massive discounts to what their worth are.
One main reason is due to its volatile business nature, which has seen its gross profit margin for its core business going up and down over the past few years. The business has also been suffering net losses from 2006 to 2009 as well as in 2011. The company had started to turn profits only recently from 2012 onwards. Obviously, this is a turnaround play to see if they can sustain the profits.
Despite the massive cash they are holding on their book, the company has also not paid dividends to shareholders since 2007. My guess is probably in view of the recent losses and volatility, the management wants to wait it out until profitability is sustained before they are willing to resume the dividends payout. Nevertheless, the key is to look out on the margin of their business.
In terms of cashflow, the company seems to operate in a competitive industry where it needs to spend quite a bit of their cash to ramp up on capital expenditure. A quick look at their PPE and you can probably see how much equipment they are using to operate on their business. Return on assets doesn’t look extremely fantastic though they are relatively reasonable given the industry they are in.
This is still a stock in review on my watchlist. I'll be watching out on further news regarding their project orders and margins.