INVESTMENT HIGHLIGHTS

• Favelle Favco’s 4QFY18 reported earnings surged by +97.9%yoy to RM21.2m

• Higher revenue contribution from Intelligent Automation of RM73.0m

• Current orderbook at RM563m as at 20 February 2019

• The bulk of the orderbook from various product segments

• Maintain BUY with a revised target price of RM2.89

Below expectations. Favelle Favco’s 4QFY18 reported earnings surged by +55.5%yoy to RM21.2m. Excluding impairments, forex losses and losses on derivatives, the company’s normalised quarterly earnings amounted to RM34.4m. Despite recording higher revenue and earnings year-over-year, its FY18 normalised earnings came in below expectations at RM64.0m accounting for 84.3% of our and consensus’ FY18 earnings forecasts due to lower sales and unrealised forex loss. Intelligent Automation segment contributed RM73.0m in revenue for Favelle Favco in 4QFY18.

Current orderbook of RM563m. As at 20 February 2019, the group’s outstanding orderbook stood at RM563m (previously RM515m as at 21 November 2018) from the global oil and gas. Shipyard, construction and wind turbine industries. However, 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.

Impact to earnings. Due to lower earnings recorded in FY18, we are revising our earnings estimates for FY19F downwards by -6.4% to take into account challenging operating environment.

Maintain BUY with a revised TP of RM2.89. We are still maintaining our BUY recommendation of Favco however, with a lower TP of RM2.89 per share. Our target price is based on EPS19 of 36.1sen pegged to a PER19 of 8.0x. 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 Feb 2019