Despite the double digit rally after we highlighted the stock (see Favelle Favco Berhad: A Safer Bet For Oil & Gas Exposure?), we opined that Favco still looks attractive on a cash-adjusted PE basis. The key reason behind subtracting cash per share from share price is to show how much we are paying for a company’s operating businesses. Given the significant amount of cash accumulated by Favco over years (around 55% of its market capitalization), you can see that its cash-adjusted PE ratio have started to widen from its PE ratio since late-2014 and is now trading at level of just 3.47X! This makes Favco one of the best proxies to gain oil and gas exposure via its offshore crane business, in our view.

Figure 1: Favco still cheap despite recent rally

Business wise, we feel that there could be more to come for Favco moving forward, especially in terms of replenishing its offshore crane orderbook as oil prices stabilize, though this could take sometimes to materialize as oil and gas activities have yet to pick up significantly so far. As a gauge, we have taken a look at market utilization rate published by HIS Markit to get a sense on the oil and gas activities and we can see only marginal improvement recently (see Figure 2).

Figure 2: Offshore Rig Count For Southeast Asia

Nevertheless, it is still delighted to see Favco being awarded new contracts from its tower crane business in beginning of the year (about RM64 million-10% of its existing orderbook), allowing it to deliver some numbers in the coming quarters before seeing any new contract flows from the oil and gas sector (see Figure 3). Expectation for the coming quarterly result (which will be released this month) is likely to be okay but do not feel that will be too much of excitement before more contract inflows.

Figure 3: New contract flows from tower crane business

In short, despite its recent rally, with its cheap valuation and expectation on oil and gas activities to pick up (need to wait for awhile), Favco still looks interesting for long term investors to hold on for more stories to play out in the coming years.