KEY INVESTMENT HIGHLIGHTS

• Favelle Favco’s 3QFY20 normalised earnings came in within estimates at RM20.8m

• The year-over-year increase in revenue was driven by higher sales of cranes during the quarter

• Operating and profit margins dipped slightly despite increase in revenue due to higher loss from associates and higher tax expense

• Current orderbook at RM511m as of 25 November 2020 including RM67m from Intelligent Automation

• FY20-21F earnings maintained

• Maintain BUY with an unchanged TP of RM3.00 per share

FFB’s 9MFY20 earnings within estimates at RM59.4m. Favelle Favco Berhad’s (Favco) 3QFY20 normalised net profit came in at RM20.8m. This brings its 9MFY20 cumulative earnings to RM59.4m which was within our full-year earnings estimates at 78.3%. Comparing against 3QFY19, revenue increased by +16.0%yoy due to increase in sales of cranes. However, normalised earnings – excluding one-off from reversal of impairment losses and gain from foreign exchange dipped by -11.9%yoy following lower margins recognised from sales of cranes arising from increased in cost of sales. Meanwhile, on a quarterly sequential basis, revenue climbed by +33.9% however, earnings declined by -10.8% correspondingly. The decline in earnings can mainly be attributable to: (i) higher tax expense incurred during the quarter and; (ii) higher loss recorded from its associates.

Revenue remains predominantly overseas driven. Favco’s year-todate revenue and earnings remains heavily reliant on its overseas cranes sales which makes up about 75.2% and 73.5% of its total revenue and earnings respectively as of 9MFY20. That said, the increasing contribution from Intelligent Automation which contributed roughly about 22.5% and 40.2% of its revenue and PBT 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 RM511m. As at 25 th November 2020, the group’s outstanding orderbook stood at RM511m (previously RM513m as at 16 th August 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 RM67m/13.1% from Intelligent Automation.

Earnings impact. We are making no changes to our FY20-21F earnings estimates at this juncture.

Target Price unchanged at RM3.00. We are maintaining our target price on FFB at RM3.00. Our TP is derived from pegging an unchanged PER21 of 8.0x to EPS21 of 37.5sen.

Maintain BUY. We reiterate our view that while we are expecting lower revenue to be recognised by FFB this year following the challenging operating environment brought upon by the oil price war earlier this year and the ongoing fight against Covid19; we believe that FFB will be able to sustain its earnings for this year. This is given that its operating and profit margins have remained intact for the past two quarters despite the restrictions brought upon by Covid-19 and enforcement of RMCO. Furthermore, as economies around the world gradually re-open we anticipate demand for both offshore and infrastructure cranes will slowly be restored as demand for crude and infrastructures returns to the market. Hence, we are maintaining our BUY recommendation on Favco for now as we continue to believe in Favco’s (i) stable orderbook mix with infrastructure-based projects; (ii) net cash position and; (iii) consistent dividend payout translating into an attractive FY21F dividend yield of 7.1%.

Source: MIDF Research - 25 Nov 2020