Higher contribution from IA cushions Favelle’s 4Q18 earnings

This article first appeared in The Edge Financial Daily, on February 28, 2019.
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Favelle Favco Bhd
(Feb 27, RM2.74)
Maintain buy with a target price (TP) of RM2.89:
Favelle Favco Bhd’s fourth quarter earnings for financial year 2018 (4QFY18) surged by an increase of 55.5% year-on-year (y-o-y) to RM21.2 million. Excluding impairments, foreign exchange (forex) losses and losses on derivatives, the company’s normalised quarterly earnings amounted to RM34.4 million. Despite recording a higher revenue and earnings y-o-y, its FY18 normalised earnings came in below expectations at RM64 million accounting for 84.3% of our and consensus’ FY18 earnings forecasts due to lower sales and unrealised forex loss. Intelligent Automation (IA) segment contributed RM73 million in revenue for Favelle Favco in 4QFY18.

As at Feb 20 2019, the group’s outstanding order book stood at RM563 million (previously RM515 million as at Nov 21, 2018) from the global oil and gas (O&G), shipyard, construction and wind turbine industries. However, the majority of the order book still consists of O&G cranes for the offshore O&G exploration and production activities at 79%. The remainder of 21% is from the shipyard, construction and wind turbine industry.

Due to lower earnings recorded in FY18, we are revising our earnings estimates for FY19F downwards by 6.4% to take into account a challenging operating environment.

Therefore, we maintain our “buy” recommendation of Favco, however, with a lower TP of RM2.89 per share. Our TP is based on EPS19 of 36.1 sen pegged to a PER19 of eight times. The average price-earning-ratio of its Asian regional peers is 11 times. We believe in Favco’s change in order book mix by increasing infrastructure-based projects; net cash position, and consistent dividend payout translating into a reasonable dividend yield. — MIDF Research, Feb 27