Faber Group Bhd (March 16, RM1.95)
Maintain market perform at 1.84 with fair value RM2.22: Faber held an analyst briefing earlier this week with respect to its 4QFY10 ending December results. We set out below the key highlights of the briefing.
Faber's 4QFY10 earnings were significantly affected by the contraction of earnings before interest and tax (Ebit) margin of 8.6 percentage points quarter-on-quarter, mainly due to higher provisions for its UAE contracts as management prefers to take a more prudent approach. Due to the provision made in 4QFY10, management mentioned it is possible that Faber would be able to reverse some of the provision in 1HFY11 once the actual costs are finalised. To recap, there is still RM100 million of work orders, which have been completed but not billed as at December 2010. Following the non-renewal of two of its United Arab Emirates (UAE) contracts, Faber will refocus on expanding its foothold in managing hospitals in UAE. Currently, the company manages 12 hospitals and clinics in UAE and is keen to expand to military hospitals there.
As reported earlier, Faber is spearheading the pilot project for the Energy Performance Management System (EPMS) under the Economic Transformation Programme (ETP) and has commenced energy audits at five public hospitals to ensure efficient use of energy. This project is estimated to result in RM18 million of savings by 2020. Although Faber has yet to decide on the business model and capex to be incurred for this pilot project, we understand that it will probably be a profit-sharing agreement whereby government will pass on a certain portion of the energy expenditure savings to Faber. Although we expect the earnings contribution for this segment will not be significant to group's earnings, this could create another revenue stream for the company and reduce earnings dependence from concessions
Despite the drop in property earnings in FY10 due to some deferment in its launches, management is optimistic of a recovery in the division's earnings in FY11 and beyond. Currently, the company has unbilled sales of RM140.8 million and is on track to launch two property projects with an estimated gross development value of RM509 million.
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.
Our earnings projections remain unchanged. Our indicative fair value for Faber remains unchanged at RM2.22 (based on sum-of-parts valuation). We reiterate our "market perform" call on the stock. — RHB Research, Mar 16
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