INVESTMENT HIGHLIGHTS

• Acquisition of Exact Automation completed on 3 July 2018

• Current orderbook is RM398m as at 24 May 2018

• 2Q18 earnings to come in within expectations

• FY18-19 earnings forecasts maintained

• Maintain BUY with an unchanged target price of RM2.92

Acquisition of Exact Automation completed. Favelle Favco’s management revealed that it has completed the acquisition of Exact Automation Group of Companies on 3 July 2018. Hence, the contribution from the acquisition is expected to be visible from 2H18 onwards. We opine that the company will be a positive addition to Favco as it: (i) Serves well-known O&G clientele; (ii) Has a 3-year earnings CAGR of 16%; (iii) Mid-teens profit margin and; (iv) In a net cash position.

Current orderbook of RM398m. As at 24 May 2018, the group’s outstanding orderbook stood at RM398m (previously RM455.9m as at 20 February 2018). Albeit decreasing, the majority of the orderbook still consists of oil and gas cranes for the offshore oil and gas exploration and production activities at 79%. The remainder of 21% is from the shipyard, construction and wind turbine industry.

2Q18 earnings to come in within expectations. Favco is expected to announce its 2Q18 earnings at the end of next month and we are expecting its normalised earnings to come in within our expectations at about RM18m.

Impact to earnings. We are making no changes to our earnings estimates at this juncture as we have factored in all the positives.

Maintain BUY with unchanged TP of RM2.92. We are still maintaining our BUY recommendation of Favco 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 - 27 Jul 2018