Uncertainty may present buying opportunity
Faber Group Bhd
(Nov 2, RM2.91)
Maintain buy at RM2.87 with target price of RM4: We are not entirely concerned about the expiry of the original deadline for renewal of Faber’s hospital support services (HSS) concession, given that Pharmaniaga experienced the same thing with regard to the renewal of its pharmaceutical supply concession, which was eventually renewed.
While there is speculation that the government might not renew Faber’s concession for East Malaysia and politics might possibly take priority, we strongly believe that the renewal should be based on track record and performance if the government is truly committed to its transformation plan.
All said, we maintain our “buy” recommendation on Faber at an unchanged target price (TP) of RM4 as the current uncertainty might present a buying opportunity for investors who are still hopeful of a favourable outcome.
Under the Clause 2.3 of the existing concession agreement, in the event that any of the current concession holders does not get any response from the government by Oct 28, it can assume that the concession is naturally terminated at the end of its expiry.
Much to Faber’s and our relief, the company received last week a letter from the Public Private Partnership Unit (3PU) of the Economic Planning Unit acknowledging Faber’s submission for renewal. The letter added that 3PU was in the process of evaluating the proposal and Faber would be informed on the progress.
Although the letter did not guarantee the concession’s renewal, it could be considered as throwing a “lifeline” to Faber and an indication that it is still in the running for the concession renewal.
It was reported early last month that the government might not renew Faber’s HSS concession for East Malaysia, and speculation that the concession might be awarded to local parties from Sabah and Sarawak instead.
At the end of the day, if the concession is awarded to other parties, they would still have to engage Faber as the sub-contractor to undertake the concession as the former might not have the expertise and experience to carry out the job.
As such, East Malaysia would still contribute to Faber’s earnings, although margins might be lower.
In the event that Faber loses its concession for East Malaysia, we believe it is always possible for the government to compensate Faber with a concession in West Malaysia that has wider geographical coverage.
Despite the uncertainty over the renewal of the concession renewal, we maintain our “buy” recommendation on Faber at an unchanged TP of RM4 based on sum-of-parts valuation.
Our fair value is based on the assumption that the concession will be renewed as it is. In view of its track record and expertise, denying Faber the renewal would run counter to the government’s recent economic reforms.
Faber is expected to release its 3QFY10 results in the middle of this month, tentatively on Nov 16. The company expects to record strong year-on-year (y-o-y) growth in revenue and earnings, supported by the lower base impact in the corresponding quarter last year, as it only started recognising contributions from its major integrated facilities management (IFM) contracts in Abu Dhabi in 4Q09.
Despite the summer season and Ramadan month, Faber expects the contribution from Abu Dhabi to remain strong in 3Q10 as the company had ramped up its activities prior to Ramadan.
As such, we expect Faber to record quarter-on-quarter growth bolstered by higher progress billing from its property division. — OSK Research, Nov 2
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