Fu Yu Corporation Limited (SGX:F13), a S$131.8m small-cap, operates in the machinery manufacturing industry, which faces increasing demand of capital equipment and machinery from developing economies in Asia, Latin America and the Middle East. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 20.8% in the upcoming year , and a whopping growth of 51.5% over the next couple of years. the growth rate of the Singapore stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Fu Yu is a laggard or leader relative to its capital goods peers.
Check out our latest analysis for Fu Yu
What’s the catalyst for Fu Yu’s sector growth?
Machinery manufacturers face the challenge of managing a plethora of new data so that it becomes useful, adapt technology to run their supply chains more efficiently. In the past year, the industry delivered negative growth of -15.3%, underperforming the Singapore market growth of 9.7%. Fu Yu also endured some headwinds, though to a lesser extent, delivering delivering a negative earnings growth of -10.4% over the past year. Furthermore, analysts are expecting this trend of above-industry growth to continue, with Fu Yu poised to deliver a 24.7% growth over the next couple of years compared to the industry’s 20.8%. This growth may make Fu Yu a more expensive stock relative to its peers.
Is Fu Yu and the sector relatively cheap?
The machinery industry is trading at a PE ratio of 9.98x, in-line with the Singapore stock market PE of 11.83x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 8.1% on equities compared to the market’s 7.7%. On the stock-level, Fu Yu is trading at a higher PE ratio of 16.95x, making it more expensive than the average machinery stock. In terms of returns, Fu Yu generated 5.4% in the past year, which is 2.7% below the machinery sector.
Next Steps:
Fu Yu is machinery industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If Fu Yu has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the capital goods sector. However, before you make a decision on the stock, I suggest you look at Fu Yu’s fundamentals in order to build a holistic investment thesis.