KEY INVESTMENT HIGHLIGHTS

• Favelle Favco’s 1QFY20 normalised earnings came in below estimates at RM15.4m

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

• >70% of revenue was tilted towards overseas sales

• Current orderbook at RM521m as of 17 June 2020

• Orderbook includes RM68m from Intelligent Automation

• FY20-21F earnings slashed by -4.89% to RM94.3m

• Maintain BUY with a revised TP of RM3.00 per share

1QFY20 earnings below estimates at RM15.4m. Favelle Favco Berhad’s (Favco) 1QFY20 normalised net profit came in at RM15.4m which was below our full-year earnings estimates at 16.2%. Comparing against 1QFY19, revenue declined by -7.3% due to lower sales of cranes whilst normalized earnings grew marginally by +5.1%yoy respectively. Meanwhile, on a sequential quarter basis, revenue and earnings slumped by -36.1% and -41.9% correspondingly. The decline in revenue and earnings during the quarter was mainly due to lower sales of cranes recognized during the quarter.

Revenue mainly from overseas sales. Favco’s year-to-date revenue remains heavily reliant on its overseas cranes sales which make up almost 72.6% of its total revenue. That said, the increasing contribution from Intelligent Automation which contributed roughly about 15% of its revenue or RM124.9m year-to-date is expected to balance it out. Going forward, the management expects to increase the contribution coming from its tower crane rentals. The rentals which are currently only applicable for its clients in Europe makes up about 12-15% of its total revenue at this juncture.

Current orderbook of RM521m. As at 17 June 2020, the group’s outstanding orderbook stood at RM521m (previously RM582m as at 26 February 2020) 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 60%. The remainder of 26% is from the shipyard, construction and wind turbine industry. The orderbook also consist of RM73m/14% from Intelligent Automation.

Earnings impact. We are reducing our FY20-21F earnings estimate by -19.5% and -18.4% as we incorporate lower sales revenue for cranes going forward due to unfavourable operating environment as a result of the spread of Covid19 which have been disrupting businesses worldwide.

Source: MIDF Research - 18 Jun 2020