Organic expansion, acquisition likely for Favelle Favco

This article first appeared in The Edge Financial Daily, on July 19, 2019.
Organic expansion, acquisition likely for Favelle Favco
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Favelle Favco Bhd
(July 18, RM2.70)
Maintain buy with an unchanged target price of RM2.89:
We met with the management of Favelle Favco Bhd (Favco) recently and came away feeling reassured about its business trajectory. Management revealed that, among others, it plans to diversify its product offerings, providing more than just the current building and selling of cranes. Without shying too far away from its current business, it plans to utilise its expertise in providing crane services to customers.

Via its exposure to Kroll Cranes, Favco has begun to provide lock, stock and barrel crane services to clients based in Denmark. As customers continue to be more sophisticated, requiring them to operate in an asset-light manner, it has started to lease out the required cranes, provides the manpower to operate the cranes as well as maintenance. The margin for this segment on Kroll is estimated to range from high single digits to low double digits. Currently making up less than 10% of the group’s total revenue, the segment’s revenue is, however, expected to continue to grow given that the segment saw a 100% growth last year from RM10 million to RM20 million.

Favco’s 70% acquisition of Exact Automation late last year is bearing fruit. The subsidiary contributed about 22% of Favco’s total revenue for financial year 2018 or RM116.5 million, and this contribution is expected to grow at an average compound annual growth rate of 10% to 15% for the next three years as it continues to focus its expertise in niche growing areas, such as solar power generation for properties and buildings as well as maintenance of buildings to enhance energy efficiency. Furthermore, 50% to 60% of Exact Automation’s revenue is recurring in nature.

Management disclosed during the meeting that it is not shying away from the possibility of acquiring a new company or expanding organically to grow the business. In terms of acquisition of new businesses, it is open to any business with an engineering base, good clientele and good business model. It is also expected to spend an estimated amount of RM50 million as capital expenditure in 2019 on building 30 to 50 new cranes, where some of the cranes would be used in the crane-leasing business.

Favco’s latest order book remains robust at RM557 million with 63% or RM351.6 million attributable to offshore cranes. Meanwhile, the balances of 24% or RM134 million and 13% or RM72.4 million are from tower cranes and Exact Automation respectively.

We have made no changes to our earnings estimates as our order book assumptions remain intact at this juncture. Furthermore, despite being positive on Favco’s future business and earnings trajectory, we opine that growth in the crane-leasing business will take a couple of years to contribute more significantly to Favco’s overall revenue. — MIDF Research, July 18