INVESTMENT HIGHLIGHTS

• Favelle Favco (Favco) entered into a Heads of Agreement (HOA) with four companies with an indicative Initial Purchase Consideration of RM87.4m

• Under the HOA, Favco intends to acquire a 70% stake in each of the four companies

• The companies are:

- Exact Automation Sdn Bhd

- Sedia Teguh Sdn Bhd

- Exact Analytical Sdn Bhd

- Exact Oil & Gas Sdn Bhd

• We are positive on this HOA as we believe that this deal will be able to further strengthen Favco’s position in the industry

• Upgrade to BUY with unchanged target price of RM2.92

Favelle Favco has entered into a HOA with four companies. The purpose of the HOA Is to acquire a 70% equity interest in each of the target companies. The target companies are Exact Automation Sdn Bhd, Sedia Teguh Sdn Bhd, Exact Analytical Sdn Bhd, and Exact Oil & Gas Sdn Bhd.

Indicative Initial Purchase Consideration of RM87.4m. This indicative Initial Purchase Consideration is eight times of the adjusted PAT for FYE 2016. An Incremental Purchase Consideration will also be paid in cash if the target companies achieve a certain cumulative profit threshold for three financial years (FY2017 – FY2019). We believe that this indicative amount is fair. Favco’s cash position as at 30 June 2017 is RM379.9m.

Cash dividend from Exact Automation of RM10m. The vendors of Exact Automation will receive a cash dividend totalling up to RM10.0m from Exact Automation Sdn Bhd over the next three financial years if the target company achieves a minimum profit threshold.

Impact to earnings. We will be maintaining our earnings pending the signing of the SPA. However, should this deal go through, we expect an earnings accretion by approximately RM15 - 20m per annum. This earnings accretion will further translate into an additional of 7 – 9sen earnings per share.

Positive on this HOA. We as positive on this HOA as we believe that this will further strengthen Favco’s position in the industry. Despite the current lack in orders for offshore cranes, we believe that Favco is still standing strong. However, with this deal, Favco will be able to further increase its exposure in the Oil and Gas industry by having the ability to be able to supply more services. In addition, Exact Oil & Gas Sdn Bhd is also a licensed company by PETRONAS to do business for the oil and gas industry in Malaysia.

Current orderbook of RM536.4m. As at 17 August 2017, the group’s outstanding orderbook stood at RM536.4m. Albeit decreasing, the majority of the orderbook still consists of oil and gas cranes for the offshore oil and gas exploration and production activities. The remainder is from the shipyard, construction and wind turbine industry.

Upgrade to BUY with unchanged TP of RM2.92. We upgrade our stance to BUY from NEUTRAL previously with an unchanged TP of RM2.92 per share. Our target price is based on EPS18 of 34.3sen pegged to a PER18 of 8.5x. The average PER of its Asian regional peer’s is 11x. We believe in Favco’s (i) change in orderbook mix by increasing infrastructure-based projects, (ii) net cash position and (iii) consistent dividend payout translating into a reasonable dividend yield.

Source: MIDF Research - 6 Oct 2017