Faber Group a good election play

Faber Group Bhd
(May 25, RM1.39)
Upgrade to buy at RM1.31 with target price of RM1.69: Faber’s earnings for 1QFY12 came within expectations at RM16.5 million, accounting for 24.1% of our and 25.5% consensus estimates. This would mean an impressive net income growth of 16.5% y-o-y. Operating profit grew 14.5% to RM31.2 million. The increase in income was contributed mainly by the higher revenue achieved by the integrated facilities management (IFM) concession business, coupled with lower consumables and maintenance costs. Higher sales and pre-tax profit from the property division added to the higher overall group earnings. However, a lower pre-tax profit from the IFM non-concession division, which tumbled 73.7% to RM1.7 million, mitigated the total profitability of the group.

Faber’s 1Q revenue decreased 7.2% y-o-y to RM184 million. The main reason behind the negative growth was the lower revenue from the IFM non-concession business, which plunged 57% y-o-y to RM17.6 million. The group’s IFM non-concession projects in the UAE recorded lower revenue due to the non-renewal of contracts for infrastructure which expired in April 2011 and maintenance of low-cost houses which ended in June 2011.

IFM concession division’s revenue grew 3.23% y-o-y to RM140.4 million, while pre-tax profit jumped 32.5% y-o-y to RM23.3 million. The higher sales amount was mainly due to higher variation orders and additional new facilities at the government hospitals within the group’s concession area. Faber’s property division also registered an encouraging performance, with revenue growing 22.2% y-o-y and pre-tax profit 39.1% y-o-y, mainly due to the higher progress billings from Laman Rimbunan phases 4 and 5 in Kepong.

On April 27, 2012, the group received a letter from Unit Kerjasama Awam Swasta (UKAS) stating that it shall for the time being, continue with the existing concession until the signing of a new concession agreement (CA) for the privatisation of hospital support services (HSS) with the Health Ministry, on which the decision is still pending. As the IFM concession business contributes 70.4% to the group’s bottom line, the terms of the extension of the HSS concession will have a substantial impact on the group’s performance moving forward.

However, we believe due to the group’s strong track record and strong government-linked investment company shareholding, it is highly probable that it will get fair terms for the new CA. In our opinion, Faber is a good election play as the terms of the concession need to be win-win for all. If status quo is retained, it will be a boost for Faber.

We upgrade our call to “buy” with an unchanged target price of RM1.69, based on nine times 2012 price-earnings ratio (PER), based on its seven-year historical PER. We believe that Faber is undervalued, battered by the uncertainty around the extension of the HSS concession. However, we are of the opinion that the group will be given a concession on fair terms, thus maintaining our target price and upgrading our call on the stock. — MIDF Research, May 25


This article appeared in The Edge Financial Daily, May 28, 2012.