We  deem  the  recent  PROPEL  and  Opus  acquisition  completion  as  a growth  catalyst  as  it  provides  a  more  diversified  earnings  base  for Faber. Upgrade to BUY (from Neutral) with a new SOP-based MYR3.25 TP (from MYR2.97, 35.4% upside). At FY15F P/E of 10.9x, ROE of 22.6% and 4.6% dividend yield, we believe it is a good time to accumulate the stock, given that its price has gone down by 26.7% YTD. 
 
Faber post merger. With the completion of the Projek Penyelenggaraan Lebuhraya  (PROPEL)  and  Opus  acquisition,  Faber  is  now  the  largest asset  and  facilities  management  (AFM)  company  in  Malaysia.  It  now offers  end-to-end  AFM  services  from  asset  development  and management  consultancy  to  facilities  maintenance.  Its  assets  post merger are now estimated at >MYR2.5bn.

Going  forward.  Faber’s  hospital  support  services  (HSS)  contract agreement  for  northern  West  Malaysia  and  East  Malaysia  is  to  be renewed  for  another  10  years  in  1Q15.  Additionally,  several  new contracts have been secured under PROPEL and Opus for 2015, which are expected to lift growth potentials going forward.

Risks. We continue to believe: i) capacity constraint at its HSS laundry plant,  ii)  competitive  non-concession  business  landscape,  iii)  muted property sales, and iv) weakening NZD will pose risks to its business.  

Forecasts.  We  adjusted  our  FY14F  earnings  upwards  to  MYR169m (from  MYR66.8m)  to  incorporate  full-year  contributions  from  PROPEL and  Opus  as  guided  by  management.  We  also  revised  our  revenue assumption to a 5-year CAGR of 6.5%, lifting our FY15/FY16 earnings to MYR179.6m  and  MYR194.8m  (from  MYR126m  and  MYR156m) respectively.

Upgrade to BUY. We upgrade Faber to BUY (from Neutral) with a new SOP-based  MYR3.25  TP  (from  MYR2.97)  on  the  back  of  strong recurring revenue and robust pipeline of projects going forward. Our new TP boasts a 35.4% upside from its current MYR2.40 price. We believe it is a good time for investor to start accumulating the stock. Not only has its price has gone down by 26.7% YTD, it has FY15F P/E, dividend yield and ROE of 10.9x, 4.6% and 22.6% respectively. 

Brighter Prospects In Store

Faber  post  merger.  We  recently  spoke  to  management  to  get  some  update  on Faber’s recent  developments and its  direction  going forward.  The  group said  that  it had  successfully  completed  the  acquisition  of  both  PROPEL  and  Opus  on  30  Oct.  Faber  now  owns  a  100%  stake  in  both  companies.  PROPEL  specialises  in infrastructure management while Opus’ expertise is in asset development as well as asset  management  consultancy  (see  Figure  1  for  the  group’s new structure  post merger). The acquisitions, which were first announced on 5 Aug 2013, was satisfied through: i) cash consideration of MYR250m and issuance of 125m of Faber shares at an issuance price of MYR2 (PROPEL), and ii) the issuance of 325.5m group shares at issuance price of MYR2 (Opus).  

With  the  completion  of  this  exercise,  Faber  is  now  the  largest  AFM  company  in Malaysia, with a combined group asset worth more than MYR2.5bn. The group now provides  end-to-end  AFM  services,  which  includes  i)  project  management  and consulting  services,  ii)  HSS,  iii)  building  and  energy  management  services,  and  iv) highway-, infrastructure- and real estate-focused operations. 

What’s in store going forward.  Management  said  it  is  currently  in  the  midst  of finalising a new HSS concession agreement (CA) and Faber is expected to sign the CA in  1Q15.  The new CA contract will be in force for 10  years starting in 2015 and will be for its HSS concessions for northern West Malaysia as well as its 40% equity partnership  with  HSS  concession  companies  in  Sabah  and  Sarawak.  The  existing agreement  started  in  Oct  1996  and  lasted  for  15  years  until  Oct  2011.  Despite  the fact  that  the  prior  CA  was  not renewed,  Faber  continued  to  be  the  concessionaire. This was due to prolonged negotiations with the Government. Under the current CA, Faber  manages  the  facilities,  equipment  and  waste  disposals  of  government hospitals.  Currently,  the  group  manages  a  total  of  80  hospitals  for  the  two aforementioned regions vs 71 hospitals in 1996.    

In  relation  to  that,  Faber  expects  to  spend  MYR15.5m  in  capex  for  the  coming  12 months.  MYR10.5m  will  be  spent  for  the  upgrading  and  reorganising  of  its  laundry plants’ capacity while MYR5m  will  be  utilised  on  a  new  microwave  disinfection system  (MDS) to be installed at its incineration plant in Kamunting, Perak. The new system  will  increase  Faber’s  operational  capacity  by  seven  tonnes/day  to  23 tonnes/day  from  16  tonnes/day  currently.  The  upgrades  are  expected  to  ease  the capacity  constraint  that  Faber  is  currently  experiencing.  Additionally,  the  group  is planning to fully upgrade its Kamunting plant in the next two years and it expects the upgraded facility  to be  fully operational in 2017.  The upgrade will allow the plant to increase  its operational  capacity  to  48  tonnes/day.  The  upgrading  is  also  to accommodate  the  contract  that  Faber  previously  secured  to  build  and  maintain  a women’s and children’s hospital in Kuala Lumpur in 3Q14. The HSS contract for this hospital will begin in 2017 and will last for 27 years.  

On its joint-venture (JV) with Apollo Hospitals Enterprise (APHS IN, NR) in India via Faber  Sindoori, much is  expected  to  remain  the  same  in  the  coming  year. Faber’s revenue will continue to be dependent on the cleaning and laundry flow coming from Apollo, aside from the biomedical equipment maintenance and facilities management it currently undertakes for the group. Competition continues to be fierce in India and we expect thin margins coming from Faber Sindoori.

For infrastructure management (IM), management said  PROPEL has secured three new  contract  wins  in  2014  that  will  be  executed  in  2015.  They  are:  i)  a  runway upgrade for the Kuala Lumpur International Airport (KLIA), ii)  the building of  an exit for North South Expressway (NSE) for Kampung Sungai Serai-Rawang, and iii)  the building  of  a  temporary  common  camp  for  workers  under  the  engineering, procurement  construction  and  commissioning  (EPCC)  of  the  Refinery  and Petrochemical  Integrated  Development  (RAPID)  project  in  Pengerang,  Johor.  In 2014,  MYR20m  was  utilised  for  the  purchase  of  new  machineries  to  boost PROPEL’S  range  of  services  such  as  very  thin  overlay  and  micro-surfacing pavement units, and automated bridge control machine. Though no capex guidance was given for this division by management for 2015, we believe that a maintenance capex  of  up  to  MYR2m  will  be  incurred  on  a  yearly  basis  for  this  division  on  the maintenance of machineries, warehousing and logistics amongst others.  

As  for  Opus,  the  asset  development  and  asset  management  consultancy  firm  has also  won  several  key  projects  for  2015  locally.  These  include  project  management consultancy  for  the  proposed  light  rail  transit  (LRT)  extension,  an  expressway network maintenance management for PLUS Expressways and pre-engineering work for the development of the Paroi-Senawang-KLIA-Salak Tinggi (SKLIA) expressway. Along with other ongoing projects across several countries, Opus will continue to be the largest revenue contributor for the group. Post merger, it contributes about 50% of  Faber’s total revenue  and  management  expects  this  to  be  maintained  going forward.

For its properties business, the outlook continues to be challenging on the back of the weak market conditions plaguing the local property market. In general, property sales have been slow due to the cooling measures implemented by Bank Negara in 2013. Faber  intends to intensify  its marketing  activities  as  well  as  re-launch  and re-brand projects in its  effort  to  boost  sales.  To  date,  only  15  units  of  Prima  Villa  (44%)  has been  sold  while  only 83  units (33%)  of  Faber  Antara  are  sold.  Both  projects  are  in Kuala Lumpur.  The GDV of the two are MYR118.4m (Prima Villa) and MYR257.1m (Faber Antara).

Risks. We think that Faber will continue to face the following challenges: i) capacity constraint  at  the  HSS  division  that  includes  insufficient  capacity  to  cope  with projected  growth  in  clinical  waste  load,  ii)  limited  number  of  commercial  HSS business  opportunities,  iii)  low  adoption  rate  of  facility management  services  in  the private sector, iv) the nature of overseas maintenance contracts that are mostly short term,  and  v)  increasing  cost  pressures  internally.  The  latter  includes  employee benefits, contractor costs and consumable costs, which make up the bulk of Faber’s total costs. Additionally, as 54% of Opus’s revenue comes from its New Zealand operation, we believe that it is highly subjected to forex translation risks. 

Forecasts.  We  adjusted  our  earnings  forecast  for  FY14  to  MYR169m  (from MYR66.8m) after management  said  that it will incorporate the full-year contributions from  PROPEL  and  Opus  instead  of  only  two  months  as  previously  guided  at  an analyst briefing in June. We have also adjusted our revenue assumption to a CAGR of  6.5%  in  2014-2018,  in  line  with  management’s guidance  of  6-7%.  With  that,  we have  also  adjusted  our  FY15  and  FY16  net  profit  accordingly  to  MYR179.6m  and MYR194.8m (from MYR126.3m and MYR156.2m) respectively. We  are  also  forecasting  for  a  50%  and  70%  dividend  payout  for  FY15  and  FY16, which  translates  to  11  sen  and  17  sen  respectively.  This  translates  to  a  4.6-7.0% yield  to  its  current  price  of  MYR2.40. With  regards  to  FY14,  Faber  has  paid  out  a special  dividend  worth  18  sen,  which  translates  to  an  85%  dividend  payout.  This translates  to  a  7.4%  yield  to  its  current  share  price.  It  also  exceeds  our  initial expectation of 50% payout for FY14.

Valuation  and  recommendation.  Following  the  revision  in  revenue  and  earnings assumptions, we upgrade our call on Faber to BUY (from Neutral) with a new SOP-based TP of MYR3.25 (from MYR2.97) based on 11.24% WACC. This gives a 35.4% upside  to  its  current  price  of  MYR2.40.  We  have  also  updated  our  WACC parameters,  which  led  to  the  revised  WACC  assumption  of  11.24%  (from  9.6%)  to streamline it with our house numbers.

We believe the upgrade to BUY is justified, as the string of new contracts coming in from  all  three  divisions  –  especially  the  highly-anticipated  renewal  of  its  HSS concession  agreement  for  the  next  10  years  –  are  expected  to  boost  its  revenue going forward. We also like the fact that ~30% of Faber’s topline post merger will be recurring  in  nature,  resulting  in  a  more  stable  revenue  stream  for  the  group.  This makes Faber less dependent on shorter-term contracts, which are harder to secure due to the fierce competition in the market.  

On another note, we view Faber’s consistency in maintaining a healthy cash balance as positive for the long run. This is because it leaves plenty of room for growth in both capacity expansion and the possibility of M&As in the future. Faber also possess very minimal levels of debt, which provides a sturdy backbone to its balance sheet.  ROE is also expected to remain strong in FY15-16 at 22.6-22.4%.  

Additionally,  as  Faber’s share price has  gone  down  by  26.7%  from  MYR3.01  in middle of November to MYR2.21 earlier this month, we believe that investors should start accumulating the stock again. This is on the group’s robust pipeline of projects acquired by all its business divisions and the increasing infrastructure expenditure in countries Faber operates in, which offers bigger opportunities for the group to acquire more projects in the future. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Faber is an end-to-end provider of  asset and facilities management (AFM) services  that  provides hospital support services (HSS) to government hospitals, infrastructure management through PROPEL, and asset development and asset management consultancy  via Opus. It also operates property business and currently has two projects in Kuala Lumpur.

Recommendation Chart

Source: RHB