Favelle  Favco  announced  new  crane  orders  for  a  total  amount  of MYR59.7m due to be delivered in 2015. The new orders are  in line withour  expectations for  FY15F.  The fundamentals of the company  remainintact  and  with  the  recent    share  price  weakness,  we  take  the opportunity  to  upgrade  the  stock  to  BUY  (from  Neutral)  with  an unchanged target price of MYR3.62 implying an upside of 16%.
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New crane orders. The new orders of offshore cranes are from Hyundai Heavy Industries (009540 KS, NR) and SK Machines Ltd for a total of MYR59.7m,  due  for  delivery  in 2015. Recall that in September, Favelle Favco also announced new orders totaling  MYR119.9m also for  deliveryin  2015.  This  brings  Favelle  Favco’s  total  announced  orderbook  to MYR916m. 

Fundamentals  are  still  intact.  We  believe  Favelle  Favco’s fundamentals and business model  remain intact. The company is able to manufacture  offshore,  tower,  wharf,  crawler  as  well  as  marine  cranes with more than 40 years’ experience in the crane manufacturing industry. Favelle  Favco  has  also  developed  the  technological  capability  to manufacture 1,000-ton cranes, subsea capable cranes and  is  currently developing  2,000-ton  cranes.  As  vessel  owners  are  looking  to  build larger-sized vessels to achieve economies of scale  and to  replace aging vessels, Favelle Favco’s new capability of manufacturing heavier cranes will benefit them in the long run.  Although crane manufacturing is a low margin business, we believe Favelle Favco has  been doing well as they are able to: i) keep costs  in check, ii) provide  tailor made cranes and  a high level of customisation, and iii) offer fast turnaround time. 

Upgrade to BUY from NEUTRAL.  As the company’s fundamentals  areintact,  coupled  with  the  recent  share  price  weakness,  we  take  this opportunity  to  raise  our  recommendation  to  a  BUY.  We  make  no changes  to  our  forecast  as  the  new  orders  are  still  within  our expectations. We derive our unchanged TP of MYR3.62 from ascribing a10x  target  P/E  for  FY15F.  This  is  at  a  discount  to  other  oil  and  gas counters  in  our  coverage,  as  while  it  is  on  par  with  other  construction counters, we consider it only a proxy to the O&G industry.

Source: RHB