Highlights

Proposed acquisition of Propel and Opus Group (OGB) is expected to transform Faber Group (FGB) into Malaysia’s largest assets and facilities management (AFM) company, and boost its regional presence leveraging on the strengths and support services of the combined group.

Propel is Malaysia’s leading engineering and infrastructure maintenance specialist with over 25 years of experience, 900 staff, 300 machineries and 722 vendors. FGB proposed to acquire 100% of Propel for RM500m to be satisfied by RM250m cash and 125m new FGB shares at RM2 each.

OGB is a multidisciplinary consultancy, providing asset development and management solutions across 85 offices worldwide, with 3,860 staff and over 12,000 clients. FGB proposed to acquire 100% of OGB for RM651m, to be satisfied by 325.5m new FGB shares at RM2 each.

Catalysts

Completion of Propel and OGB acquisitions, targeted by 4Q2014 upon receiving all relevant approvals.

New project wins at the concession and non-concession divisions, without sacrificing margins.

Potential further value-accretive acquisitions given FGB’s expected net cash position of around RM250m post completion of Propel and OGB mergers by 4Q2014.

Risks

Hiccups and delays in Propel and OGB mergers, which are still pending approvals from relevant authorities.

Further dilution of agreement terms as evident in the ongoing renewal of hospital support services (HSS) new concession agreements (nCAs) for Sabah and Sarawak.

Deteriorating margins as a result of fierce pricing competition at the non-concession division, and lower-than-expected take-up rates at outstanding property development projects.

Forecast

We have assumed completion of Propel and OGB mergers by 4Q2014, and the finalisation of HSS nCAs for Sabah and Sarawak by Jan 2015, with FGB’s 100% stakes diluting to 40% for both regions.

Rating

Not Rated

Positives

• Merger with Propel and Opus to immediately expand scope of services offered by Faber given acquisition of skills.
• Faber to be able to leverage on strengths and support services of the combined group.
• Regional presence to be boosted as a larger group, ultimately achieving Faber’s aim to be a regional champion in consultancy and project management.

Negatives

• Pending renewal of HSS nCAs for Sabah and Sarawak, and dilution of 100% controlling stake to 40% associate stake.
• HSS concessions facing capacity constraints.
• Non-concessions facing pricing and cost pressures.
• Lack of new landbank at property development division.

Valuation

Assuming a 2015 P/E of 18x (10% discount to peers) implies a fair value of RM4.00 per FGB share. Including an expected dividend return of 2.8% suggests a potential upside of 15.8% from here.

Source: Hong Leong Investment Bank Research - 2 Jul 2014