We initiate coverage on Favelle Favco (FFB) with a BUY and a fair value (FV) of MYR3.35, pegged to 10x FY13 EPS. In view of the company’s record-high orderbook since 2009 and our positive view on the O&G sector, we believe that the market has been behind the curve in valuing this stock. Our FV implies a potential return of 58.0%.

Niche in customised cranes. Favelle Favco (FFB) is a 62%-owned subsidiary of Muhibbah Engineering, with a core business in manufacturing customised cranes for the offshore oil & gas (O&G), construction and ports/wharf industries.

Brighter O&G outlook means more crane orders. Given the encouraging global outlook for the O&G industry, and based on the average oil price of USD95/bbl for FY13 as well as anticipated flow of new O&G projects, we are bullish on the offshore crane segment for FY13 and FY14.

Record orderbook since 2009. FFB’s orderbook stood at MYR634m at 22 Feb 2013, of which 83% are from overseas customers. Some 88% of the cranes in its orderbook are O&G cranes while the remaining 12% are destined for towers and shipyards. A recently-awarded MYR78.8m contract boosted FFB’s orderbook to its highest since 2009, lifting its total value to some MYR713m as at 21 Mar 2013.

Alluring dividend yield of 3.9%. While the company has yet to have a formal dividend policy, it has distributed more than 20% of its earnings annually to shareholders. For FY12, the board has proposed a 1.35 sen gross dividend on top of a 6.65 sen tax-exempt dividend. This will bring the full-year dividend to 7.66 sen, or a net yield of 3.9% for FY12.

MYR3.35 FV provides 58% upside potential. Our 10x valuation on FFB’s FY13 earnings implies a 35% discount to its local O&G peers and 27% discount to its American peers. The stock is currently trading in line with its 5-year mean at 6.5x forward earnings, which does not reflect its growth potential.

Source: RHB