Faber Group Bhd
(Sept 21, RM3.24)
Maintain outperform at RM3.16 with fair value of RM3.82: Recall Faber submitted its application for a renewal of its government hospitals non-medical support services concession to the Ministry of Health in October 2009.
The outcome is expected to be known by this October. Faber’s 14-year track record and technical expertise are evident from: (i) the company’s ability to expand its integrated facilities management (IFM) business locally and overseas; (ii) its access to skilled, semi-skilled and unskilled labour supply to support the five basic services under the concession; and (iii) the operation of laundry and waste disposal facilities required under the concession.
Therefore, we maintain our view that the concession agreement is likely to be renewed.
Management expects softer UAE earnings in 2H2010 due to seasonal factors, that is Ramadan and summer when less work can be done.
This is in line with our expectation.The implementation of the new IFRIC 15 accounting standard on real estate development has been deferred to January 2012, from July 2010 previously.
As such, Faber will continue to recognise its earnings based on percentage of completion, that is progressive billing method, rather than completion method under IFRIC 15. As such, we have revised up our FY2011 property earnings to RM200 million from none previously, while lowering our FY2012 property earnings to RM300 million (from RM495 million previously).
This has no impact on our fair value calculation which includes property based on discounted cash flow.
Risks to our view include: (i) failure to secure an extension to the concession agreement with the government; and (ii) delays in property launches and approvals, which could affect revenues from the property segment.
We make no change to our FY2010 forecast.
However, as highlighted above, our FY2011/12 EPS forecasts have been revised by 29.9% and -16.6% respectively for the deferment of IFRIC 15.
Our sum-of-parts (SOP) fair value remains unchanged at RM3.82.
If the concession is not renewed, our “worst-case” SOP valuation will fall to RM2.21,that is 30% below the current share price, but we see little risk of this happening.
On the contrary, our forecasts currently factor in a 10% drop in service fees under a renewed concession, but we believe the company will likely negotiate for higher fees to account for inflation. We thus reiterate our “outperform” call on the stock. — RHB Research Institute, Sept 21
This article appeared in The Edge Financial Daily, September 22, 2010.
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