Quarterly Result (Malaysia) – Favelle Favco Berhad (Q3 FY16)

Last TradedPrice RM 2.31
Previous Price* RM 2.33
Target Price* RM 2.75
Rating* BUY (maintained)
Price to Earnings** 5.8x
Price to Cash Flow** 4.0x
Price to Book** 0.9x

* As of 26/08/16
** As of 04/12/16 (Source: Morningstar)

The announcement of new contracts of RM 70.6m on 2/11/16 has failed to boost investors’ sentiment, and the share price has been trading sideway since then. The tough trading environment has led to the poorer quarterly result. YTD, the revenue and net profit declined by 34.8% and 24.1% respectively. Gross profit margin slightly deteriorated from 14.5% to 14.2% (YTD). The favourable tax expense in current quarter improved the net profit (mainly attributable to positive tax receivables in Q3 which has resulted in lower effective tax rate), margin improved from 10.3% to 11.9%.

Negative observation from the quarterly report:
1) The material adverse change in both top line and bottom line results. Q3 Revenue and net profit, in absolute terms, declined by 55% and 25.8% respectively.

2) Capex spending over the nine months period has surged significantly from RM 16m to RM 32.7m which has weakened its free cash flow generation and FCF margin reduced from 40.9% to 21.3%.

Positive observation from the quarterly report:
1) Dividend paid in the cash flow statement reflects a dividend yield of 6.49% which is considered decent (Based on the market capitalization of RM 511m). The dividend distributed represents an increase of 26.4%, from RM 26.3m to RM 33.2m (9 months result). 

2) Over the nine months period, profit and cash flow margins improved.
Net Profit Margin increased from 10.3% to 11.9%
CFO Margin increased from 46.5% to 47.2%
FFO Margin increased from 40.5% to 56.5%
However, such improvements are insufficient to offset the poor trading performance.

3) Increased in the order book of RM 70.6m which could be attributable to the recovery in oil price. OPEC group agrees to cut production after two years which is said to reduce the global output by 1%. The oil price has increased to one-year high and the sustainability too early to assess.
Favco q3-16

4) Bank borrowing declined from RM 64m to RM 27m resulted in Debt / EBITDA of 0.2x. Although we view this positively, the significant cash position could be used to conduct share buy-back to reduce the available of shares outstanding rather than reducing its already low leverage.

Summary
The result came in worse than our expectation, and the high Capex spending has also weakened its cash flow generation. On a relative basis, various profit and cash flow metrics have shown improvements though insufficient to comfort the investors’ sentiment. The recovery in oil price could be a catalyst for potential re-rating as the news of OPEC group, along with the non-OPEC group, agreed to reduce the global output by 1%.
Favco q3-16-2

Wells Fargo research believes that a slow recovery toward a near-term equilibrium of $55-60 by H2 16. Cantor Fitzgerald O&G research puts a floor of $50 per barrel for oil price. We believe it will send a positive signal to the market although the impact on the future order book is too early to evaluate. The current share price of RM 2.31 is currently trading at close to the support (RM 2.30). We currently have a BUY rating on Favco with a target price of RM 2.75 (based on our estimation as of 26/08/16).

Favco q3-16-3
(Source: ISaham)

Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.
Valuation will be performed annually. Thus we will update the latest valuation in the next quarter.

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