Highlights

Game changer… UEM’s proposal to inject PROPEL and OPUS into Faber Group will be a game changer for the company. The move will transform Faber into the largest asset and facility management company with diversified portfolios in the healthcare, infrastructure and commercial sectors.

More importantly, it will cushion the anticipated decline in earnings while more than doubling its earnings base from ~RM57m/year to ~RM170m/year. The enlarged entity with a potential market capitalisation of >RM2bn and recurring income business model may result in a rerating catalyst for Faber and ultimately lead to stronger interests from institution following.

Attractive offerings… Although not privy to the concession details held by both PROPEL and OPUS; based on simple historical P/E calculation, valuations for both companies seems decent and palatable, translating to a FY12 P/E of 9.3x and 11.3x respectively. Faber will have no issue in terms of the RM250m cash outlay as it is in a net cash position of RM310m as of 1QFY13.

Cushioning earnings decline… Based on consensus’ estimates, Faber’s EPS are expected to decline by 36.5% in FY13 and another 18.4% in FY14. With PROPEL and OPUS’ contribution, earnings are expected to contract at a slower pace, notably for FY14, by 4.9% vis-à-vis 18.4%. On average, EPS for FY13-FY15 are expected to increase by ~26% (comparing pre vs post offer) despite the dilution impact from the increase in share base. Hence, indicating an earnings accretive proposal for Faber.

In the same boat… Due to the share swap portion, Faber’s share base is expected to increase by 124% to 813.5m shares from 363m shares. The deal will see UEM’s holding in Faber increase from 34.3% to 70.7%. Hence, we believe that UEM’s interest in Faber will be aligned with the minority shareholders and will be beneficiary for both parties.

Risks

1) Delays in completing the proposed deal; 2) Failure in renewing existing and securing new concession contracts; and 3) Regulatory and political risk.

Forecasts

Proforma estimates based on historical and Bloomberg estimates.

Rating

Not rated.

Valuation

Given the potential rerating catalysts, we believe that Faber should trade at the higher range of the P/E band at 12x multiple. The recurring income should allow an estimated payout ratio of 50%, hence translating to FY14 dividend yield of 4.4%.

By applying a 12x multiple on average FY13-FY15 EPS, our Target Price works out to RM2.59, implying a total upside potential of 13.7% (including FY14 dividend yield of 4.4%).

Source:Hong Leong Investment Bank Research - 13 Aug 2013