Highlights

Game changer in sight… Faber announced last Friday to enter into a conditions share sales agreement with UEMG for the acquisition of PROPEL and OPUS with a value of RM1.15bn. The deal is expected to be completed by 2H14. The move will transform Faber into the largest asset and facility management company with diversified portfolios in the healthcare, infrastructure and commercial sectors.

Attractive purchase price … To recap, on 5 Aug-13, Faber has received an offer to acquire PROPEL and OPUS for RM500m and RM651m respectively in a cash plus new share issue (see Figure #1 for details). The purchase price translate to 9x FY13 PER for Propel and 9.6x for Opus.

PROPEL and OPUS beat expectation… FY13 earnings for OPUS and PROPEL have come above our expectation. PROPEL continue to perform well due to contribution from various maintenance projects while OPUS FY13 earnings surged by 18% due to overall growth in the Malaysia, oversea operations and contribution from new subsidiaries (see Figure #2 for details).

Cushion earnings decline… After the acquisition, it will cushion the anticipated decline in pre-acquisition earnings while more than doubling its earnings base from ~RM57m/year to ~RM190m/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.

Strong balance sheet…Faber has net cash of RM240m or RM0.30 per share after completion of the acquisition. Stripping out the cash, the company is only trading at 11x FY15 PER now.

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

Overall, we raised our proforma earnings estimates for FY14 and FY15 by 7% after take into account the FY13 numbers from PROPEL and OPUS.

Rating

Not rated.

Valuation

By applying a 15x multiple on FY15 EPS, our Target Price works out to RM3.51, implying a total upside potential of 26.6% (including FY14 dividend yield of 3.9%).

Source: Hong Leong Investment Bank Research - 22 Apr 2014