NOT RATED
Target Price: RM2.01

Period
2Q12/1H12

Actual vs. Expectations  

• The reported 1H12 revenue and net profit of RM334.2m and RM29.5m came in above our expectations, accounting for 64% and 60% of our full year estimates.  
• The variance to our earnings estimates was due to a higher than expected revenue on the back of speedier execution (delivery of cranes) and larger order backlog. 

Dividends
No dividend was declared.

Key Results Highlights  

• YoY, the net profit grew significantly (+139%) to RM19.2m (from RM8m) largely on the back of Favelle's large order backlog, which were predominantly pedestal crane works. The pre-tax margin has also expanded from 8.3% to 9.6% as the pedestal crane contract earns a higher margin. The 1H12 net margin increased by 2.1ppts due to the utilisation of its remaining tax incentive (Investment Allowances) for FY12. However, we do not view this as sustainable given that Favelle's tax incentive will end by May12.  
• QoQ, the net profit jumped by 87% due to a higher revenue recognition of the completion and delivery of its pedestal cranes. The lower effective tax rate was also one of the main drivers of the better net profit earnings. The effective tax rate for 2Q12 was at 2% as compared to 7% in 1Q12. 

Outlook

• Higher effective tax rates for 2HFY12.  
• However, there would be better order book replenishment due to the sustainable oil and gas sector prospects. We believe that Favelle will be able to secure RM450m for its order book replenishment in FY13.  
• New entity in China will spearhead Asian region growth.  
• New service centre (expected to be completed by yearend) will expand its domestic crane segment prospects. 

Change to Forecasts  
We tweaked our FY12-13 earnings by 6.6% and 3.9% respectively as we have revised our project execution assumptions for FY12 to 80% (from 70% previously). We have also revised our FY13 order replenishment higher from RM400m to RM450m.

Rating 
NOT RATED

Valuation
We have revised our fair value to RM2.01 (from RM1.94) based on an unchanged 8.0x targeted PER on FY13E earnings (a 6.6% premium to Uzma's ascribed PER of 7.5x due to Favelle's higher share base and its commendable net profit track record).

Risks
1) Lower-than-expected contract replenishment due to a slowdown in the oil and gas sector and
2) a slowerthan- expected growth from new ventures (such as China yard and Kemaman service centre).

Source: Kenaga