The price tag of RM16 million for the 49.75% stake in Potential Region is fairly consistent with the minority interests of RM16.5 million in Fajarbaru's balance sheet (solely from Potential Region as it is the only non-wholly-owned subsidiary of Fajarbaru). This means that the transaction values the land effectively at its book value of RM46.2 million, or RM7.55 psf, at a premium to the asking prices of RM2.40 to RM6.05 psf in the Si-Rusa-Sunggala area in Port Dickson. However, we believe the premium is justifiable given that 91% of the land is already subdivided into orchard homestead/bungalow lots, 3% into commercial land with the remaining 6% carrying an agricultural land title.

We are neutral on the latest development. We believe Fajarbaru's latest move is purely tactical, that is to have full control over Potential Region. We do not believe Fajarbaru is in a hurry to relaunch the PD Homestead Resort project, given the generally soft property market in Port Dickson. Ceterus paribus, the acquisition will reduce Fajarbaru's net cash of RM123.7 million, or 74 sen per share as at March 31, 2010, to RM107.7 million or 64.8 sen per share.

Forecasts maintained as the interest income foregone on the RM16 million cash outflow will reduce FY2006/11 net profit by less than 1%.

The risks include new contracts secured in FY2006/11-12 coming in below our target of RM250 million per year and rising input costs.

We are positive on the construction sector as we foresee construction stocks to generally outperform the market in 2H2010, buoyed by news flow particularly from: (i) the RM36 billion Kuala Lumpur mass rapid transit (MRT) project; (ii) the RM7 billion Ampang and Kelana Jaya light rail transit (LRT) line extension project; and (iii) federal land deals. For Fajarbaru, additional kickers will come from its still undemanding valuations and a strong balance sheet with net cash of RM123.7 million as at March 31, 2010, translating to a whopping 74 sen per share. Indicative fair value is RM1.39 based on 10 times fully-diluted CY2011 EPS of 13.9 sen, in line with our benchmark one-year forward target PER for the construction sector of 10 to 16 times. ? RHB Research Institute, July 13

This article appeared in The Edge Financial Daily, July 14, 2010.