KEY INVESTMENT HIGHLIGHTS

• Favelle Favco’s 3QFY19 normalised earnings came in at RM28.1m

• The year-over-year decline in revenue is attributable to lower sales of cranes during the quarter

• 60% of revenue is tilted towards overseas sales

• Current orderbook at RM564m as of 20 November 2019

• Orderbook includes RM100m from Intelligent Automation

• FY19-20F earnings maintained

• Maintain BUY with a revised TP of RM3.22 per share

3QFY19 earnings within estimates at RM28.1m. Favelle Favco Berhad’s (Favco) 3QFY19 reported net profit came in at RM23.6m. However, its normalized earnings after excluding losses from forex and derivatives of about RM4.54m; came in at RM28.1m. This brings its 9MFY19 earnings to RM63.7m which is within our full-year earnings estimates at 79.8%. Comparing against 3QFY18, revenue and earnings dipped by -31.7% and -11.3%yoy respectively while on a quarterly sequential basis, revenue declined by -43.6% whilst earnings increased by +34.2% respectively. The decline in revenue was mainly due to lower sales recognized during the quarter.

Revenue mainly from overseas sales. Favco’s year-to-date revenue remains heavily reliant on its overseas crane sales which makes up almost 60% of its total revenue at RM266.9m. That said, the increasing contribution from Intelligent Automation which contributed RM83.8m year-to-date is expected to balance it out.

Current orderbook of RM564m. As at 20 November 2019, the group’s outstanding orderbook stood at RM564m (previously RM562m as at 16 August 2019) 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. The orderbook also consist of RM100m from Intelligent Automation.

Earnings impact. We are making no changes to our FY19-20F earnings estimates at this juncture.

Maintain BUY with a revised TP of RM3.22. Post rolling forward our valuation base year to FY20, we are maintaining our BUY recommendation on Favco with a revised target price of RM3.22 (from RM2.89 previously). Our TP is derived from pegging an unchanged PER20 of 8.0x to EPS20 of 40.2sen. 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 an attractive FY20F dividend yield OF 5.5%.

Source: MIDF Research - 27 Nov 2019