Financial Commentary – Favelle Favco (Dec 16)

Looking ahead of 2017, we are under the impression that the engines for growth for Favco are likely coming from the oil price recovery and high domestic infrastructure needs. We view Favco’s outlook positively as it is well-positioned to benefit from the potential surge in capital expenditure from O&G companies and high infrastructure needs in Asian countries.


China-led Asian Infrastructure Investment Bank (AIIB) has recently approved few loans to fund various infrastructure projects such as gas pipeline in Turkey-Azerbaijan and since operating from this year, it has granted total loans of $1.73billion (as of 21 December 2016). AIIB started with a capital of $100 billion (originally was $50 billion) and to put it in a different perspective; WorldBank has a capital base of $223 billion, and Asian Development Bank has $175 billion. The aims of AIIB is to bridge Asia’s infrastructure funding gap which is estimated to be $8.2 trillion (according to Asian Development Bank). We believe, to some degree, will strengthen the demand for tower cranes and crawler cranes. However, we noted that Favco is highly exposed to O&G industry, and the establishment of AIIB may present an opportunity for Favco to expand into high growth territory.


The surge in crude oil price will certainly give some breathing space to the O&G companies, and many financial institutions are projecting the oil price will stay at around to $55, and Cantor Fitzgerald puts a floor of $50 on oil price. We expect the order book will start to build up as the oil price sustained at the current level.


P/E ratio at historical mean is largely due to weak quarterly result which was way below our expectation. As the share price currently trading at support, the downside risk may be minimal.


Favco is currently trading at two-year low, falling outside one standard deviation. We could potential see multiple expansion based on P/B (although this might be a wishful thinking without material improvement in financial, or at least sustained at previous level).


A back-of-envelope calculation, we expect the Return on Equity for FY 16 to be approximately 12% to 13% which we deem as acceptable. We currently have a BUY rating on Favco with a target price of RM 2.75 which implies an upside potential of 16% (current price: RM 2.37). We anticipate the order book will begin to grow by next year which indicates decent medium-term demand as the construction and O&G companies gain confident in operating environment.  We like Favco for its robust cash flow generation (in terms of its ability to convert profit into cash flow), clean balance sheet and well-positioned to benefit from infrastructure investments domestically and regionally.


The key risks to our BUY call are:
1) Oil price recovery fails to boost O&G capital expenditure; the companies are overly cautious.
2) Fails to benefit from the regional infrastructure investments.
3) Further material adverse change in financials.
4) Competitors attempt to gain market share through price cutting.


For discussion of Favco’s Q3 FY16 result, click here.
For equity research, click here.
Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be it monetary or non-monetary) for any actions rely on the information discussed.

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