Finally starting to move forward. Fu Yu announced on 7 December that it planned to spend S$20.3m to privatise 71%-owned Bursa-listed LCTH Corp (LCHT MK, Not-rated). This move follows a change of a major shareholder, Ng Hock Ching, who exited his > 12% stake in the company last year. This sequence of events indicate to us that the company may be ready to embark on its next phase of growth, both organically and through M& A, with the S$92m cash on its balance sheet.

Impact
Fu Yu is one of the largest manufacturers of high precision plastic parts and moulds in Asia, with manufacturing facilities in Singapore, Malaysia and China. It began paying 1.5 SG cents dividend from FY15 onwards, translating to an attractive yield of 7.5%. Its net cash position of S$92m (12 SG cents/sh or 62% of its current market cap) may allow it to fund inorganic growth. Alternatively, it is an attractive privatisation candidate given its ability to generate healthy free cash flows every year.

Valuation & Action
Downside protected by > 5% dividend yield. Overall, the risk-reward dynamics for Fu Yu is favourable to us given its attractive dividend yield, healthy balance sheet and recovering earnings growth. Free cash flow is enough to sustain its 1.5 SG cents dividend, which amounts to a total annual cash outflow of S$11m. Meanwhile, free cash flow generated averaged around S$18m per annum. Even if we were to account for a lower dividend of 1.0 SG cents due to the S$20m cash outflow to privatise LCTH this year, it would still offer a decent dividend yield of 5.0%.

Focusing on growth. Business is beginning to improve as it reported two consecutive quarters of QoQ earnings. It has highlighted the medical, green products and security sectors as potential growth opportunities. In addition, Fu Yu has made inroads into the automotive sector, which we believe may contribute more meaningfully over the next 2-3 years.

Risks
Competitive landscape remains challenging and may lead to margin erosion. Forex risk as around 80% of its sales are in USD while expenses are in USD (50%) and RMB, MY, SGD.