KEY INVESTMENT HIGHLIGHTS

• Favelle Favco’s 2QFY20 normalised earnings came in within estimates at RM23.3m
• The year-over-year decline in revenue was attributable to lower sales of cranes during the quarter
• Operating and profit margins remained intact during the quarter due to steady sales margin despite lower revenue
• Current orderbook at RM513m as of 26 August 2020 including RM76m from Intelligent Automation
• FY20-21F earnings maintained
• Maintain BUY with an unchanged TP of RM3.00 per share

FFB’s 1HY20 earnings within estimates at RM38.7m. Favelle Favco Berhad’s (Favco) 2QFY20 normalised net profit came in at RM23.3m. This brings its 1HFY20 cumulative earnings to RM38.7 which was within our full-year earnings estimates at 51.0%. Comparing against 2QFY19, revenue dipped by -51.1%yoy due to lower sales of cranes. However, normalised earnings excluding one-off gain from disposal of PPE, gain on forex and loss on derivatives; grew by +41.3%yoy to RM23.3m following steady margins recognised from sales of cranes and prudent cost measures put in place during the quarter. Additionally, we believe that it would have also benefited from the better foreign exchange rate during the quarter (MYR depreciated against USD by +4.5%yoy during the quarter) as most of its sales are overseas driven. Meanwhile, on a quarterly sequential basis, revenue slumped by -32.6% whilst earnings grew by +51.0% correspondingly. The decline in revenue during the quarter was mainly due to lower sales of cranes recognized during the quarter as a result of the enforcement of the movement control order (MCO) during the period which restricted business operations.

Revenue remains mainly from overseas sales. Favco’s year-to-date revenue and earnings remains heavily reliant on its overseas cranes sales which makes up about 82.2% and 73.5% of its total revenue and earnings respectively as of 1HFY20. That said, the increasing contribution from Intelligent Automation which contributed roughly about 19% and 26% of its revenue and earnings year-to-date is expected to balance it out. Going forward, 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 RM513m. As at 26th August 2020, the group’s outstanding orderbook stood at RM513m (previously RM521m as at 17th June 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 RM76m/14.8% from Intelligent Automation

Source: MIDF Research - 26 Aug 2020