Favelle Favco Bhd
(July 23, RM2.75)
Not rated with a fair value of RM3.11: Favco offers high-speed, high-capacity customised cranes under two renowned brands, Favelle and Kroll.

It focuses on offshore crane manufacturing, serving shipyards and big oil majors, such as Keppel Fels Ltd, ExxonMobil, Shell, Petroliam Nasional Bhd and China National Offshore Oil Corp.

In addition, Favco also supplies tower cranes that have been used to build some of the world’s tallest buildings, like Burj Khalifa in the United Arab Emirates, the Shanghai Tower in China, and One World Trade Center in New York.

We were guided that purchase enquiries remain intact, but the timing of order confirmation is uncertain as clients might be taking a wait-and-see attitude. 

Year to date to May 2015, Favco has secured orders worth RM85.7 million, bringing its total outstanding order book to RM967 million.

We anticipate the company to secure more orders in the second half of 2015, in view of the stabilising crude oil prices. However, it could be hard to maintain the same level of replenishment as last year, due to the slowdown in the oil and gas industry, and massive capital expenditure cuts by oil majors.

With an estimated burn rate of 60% for financial year 2015 (FY15), we project Favco’s full-year FY15 revenue to grow 10.3% year-on-year to RM879.8 million, but subsequently dropping slightly to RM853.2 million for FY16.

We understand that the crane manufacturing business typically generates a net margin of 8%.

That said, Favco has been achieving net margins ranging between 8.5% and 10.5% for the past three years. For the fourth quarter of FY14 (4QFY14) and 1QFY15, net margins were even higher at 12.1% and 11.8%, respectively.

We are confident of the company maintaining its net margin at least at the low double-digit levels, riding on its ability to minimise cost leveraging with a global geographical presence.

However, limited gain from the stronger US dollar is expected due to high currency hedge ratio. 

More than 50% of Favco’s sales orders are denominated in US dollar, and the company has taken a relatively conservative approach to hedge approximately 60% of its US dollar currency exposure. 

Therefore, Favco may not be able to benefit much from the recent strengthening of the greenback.

Favco started to offer crane maintenance services by operating a new plant in Kemaman, Terengganu, since early this year. The plant aims to create more recurring income by extending its maintenance services to non-Favco-manufactured cranes, while seeking more business opportunities on the east coast of Peninsular Malaysia.

The contribution from the plant is minimal and insignificant at this point of time.

Favco has been consistently distributing dividends with an average payout ratio of 28 for the past five years.

Assuming the same payout ratio is maintained for FY15 and FY16, this could translate into a dividend yield of 4.1% and 3.9%, respectively. 

We believe such dividend distributions are likely as the company is in a net cash position of RM185 million as of 1QFY15, coupled with a healthy cash flow from its operations. — Kenanga IB Research, July 23

This article first appeared in The Edge Financial Daily, on July 24, 2015.