INVESTMENT HIGHLIGHTS

• Favelle Favco (Favco) is in the midst of diversifying its revenue base

• Creating depth in its crane business via Kroll Cranes

• Leveraging on Exact Automation niche business model

• Current orderbook is RM557m as at 24 May 2019

• FY19-20F earnings estimate maintained

• Maintain BUY with an unchanged target price of RM2.89

Gradually diversifying its revenue base. We met with the management of Favelle Favco (Favco) recently and came away feeling reassured on its business trajectory. Management reveal that among others, it plans to diversify its products offerings providing more than just the current building and selling of cranes. Without shying too far away from its current business, it plans to utilise its expertise in providing crane services to its customers.

Creating depth in its crane business. Via its exposure in Kroll Cranes in Denmark, Favco has begun to provide a lock, stock and barrel crane services to its clients based in Denmark. As its customers continue to be more sophisticated which requires them to operate in an asset light manner, it has started to lease out the required cranes, provides the manpower to operate the cranes as well as; the maintenance required for the cranes. The margin for this segment from Kroll is estimated to range from high single digit to low double digit. Even though currently the segment’s revenue makes up less than 10% of the group’s total revenue but the segment’s revenue is expected to continue to grow given that the segment has seen a 100% growth last year from RM10m to RM20m.

Growing contribution from Exact Automation. Favco’s 70% acquisition of its subsidiary Exact Automation late last year is seen to be bearing fruit. The company is now contributing about 22% to Favco’s total revenue in 2018 or RM116.5m and this contribution is expected to grow with an average CAGR of 10-15% in the next three years as it continues to focus its expertise on niche growing areas such as:, solar power generation for properties/buildings and maintenance of buildings to enhance energy efficiency etc. Furthermore, 50-60% of Exact Automation’s revenue is recurring in nature.

Not ruling out any future acquisition or expansion. Management disclosed during the meeting that it is not shying away from the possibility of acquiring a new company or expanding organically to grow the business. In terms of acquisition of new businesses, it is open to any business with an engineering base, good clientele and good business model. It is also expected to spend an estimated amount of RM50m in CAPEX in 2019 to build 30-50 new cranes where some of the cranes would be used in its crane leasing business.

Orderbook remain intact at RM557m as of 24 May 2019. The latest orderbook for Favco remain robust at RM557m with 63% of the orderbook or RM351.6m is attributable to the offshore cranes. Meanwhile the balance of 24% or RM134m and 13% or RM72.4m is from the tower cranes and Exact Automation respectively.

Impact to earnings. We are making no changes to our earnings estimates as our orderbook assumptions remain intact at this juncture. Furthermore, despite being positive of Favco’s future business and earnings trajectory, we opine that the growth in its crane leasing business will take a couple of years to contribute more significantly to Favco’s overall revenue.

Maintain BUY with an unchanged TP of RM2.89. All in, we are still maintaining our BUY recommendation of Favco with an unchanged TP of RM2.89 per share. Our target price is based on EPS19 of 36.1sen pegged to an unchanged 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 very attractive dividend yield.

Source: MIDF Research - 18 Jul 2019