On 29/08/2016, we have posted a research on Favco with a target price of RM 2.75. The share price during this period has been trading sideways possibly due to the lack of re-rating catalysts to boost investors' confidence.

This article aims to show the investors, with the aid of Bloomberg data, the relative valuation of Favco against the overall market.




At the moment, there are three investment houses covering Favelle Favco Bhd with an average target price of RM 2.52 (upside potential of 6.8%). And all are currently having neutral recommendations on the stock.




The EV / EBITDA currently at 1.95x which we believe is at deep discount. Its ample cash reserves despite of its generous dividend distribution provides it sufficient strength to overcome its tough trading conditions. P/E is trading at 6x and free cash flow although deteriorated, we believe it still demonstrates the company is good at generating cash flow from operations.





Currently P/Es of Favco and KLCI are trading at 5.9x and 18.0x respectively. That is representing close to 70% discount.




When compared it against small cap index, the discount is almost at 80% (P/E of small cap index is 32.4x which is deem to be high end). However, this is only for illustration purposes as we do not want investors to be fool by the deep discount in this instance. The reason is because small cap stocks, in generally, have higher growth prospects hence stocks deserve to be valued at higher multiples. The benchmark against small cap is for information only.




With P/B, KLCI on average is around 1.73x while Favco is 0.96x.




P/S suggests a much deeper discount as the KLCI is currently trading at 2.6x Price to Sales while Favco is 0.7x.




Despite the fact that it is a relatively small company, its cash flow generating ability allows it to pay dividend distribution. Dividend coverage is sustained at above 3x (based on net income and free cash flow). Dividend yield of 6.3% is quite attractive while the general market is paying 3% on average.








Lastly, the peer comparables identified by Bloomberg showed that on average, the P/E and ROE is at 27x and 7.23% respectively. It is worth pointed out that the average market is higher than that of Favco. The market cap is generally above RM 1b (those that we can see at least). The multiples discount is in the range of 40% to c. 90%.




Summary
- From the valuation metrics, majority of them suggest that Favco Berhad is a defensive counter currently trading at support and deep discount relative to the general market.
- Strong dividend coverage with attractive dividend yield.
- Well-positioned to benefit from the regional infrastructure growth with the establishment of Asian Infrastructure Investment Bank that committed to fund the infrastructure needs of the asian economies.
- Strong balance sheet with huge cash balance and low leverage.
- Good cash flow generating ability


Key Investment Risks
- Do not foresee any re-rating catalysts
- Any slow down in order book
- Fails to benefit from the regional infrastructure growth fueled by the credit from AIIB.
(In September 2016, AIIB has granted loans worth $320m to support energy projects in Pakistan and Myanmar which we believe more loans will be approved in the near future to support regional development which emerging markets are most needed).
- Any unexpected accidents that would weaken Favco's reputation.
- Relative small with no meaningful global presence



The information provided by Bloomberg have not been verified by us hence we assume the data is correct. Our research report can be found by clicking on this link. It is worth pointed out that the above relative valuations are measured against the general market rather than the specific industry (Cranes for instance) hence it could be materially different. The above only serves as an information purpose with no attempt to value the company.



Kind Regards and Happy Trading,

KapitalWise



Disclaimer: the views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.