Saturday, November 14, 2009

Faber -- The Empire Strikes Back, Part II

Since the share price has appreciated by almost 30% within a short period of time, it will be appropriate for me to start off with some technical stuffs. Two key price points to watch, $ 1.58 and $ 1.86. Those want to trade on the short-term basis should know what are your odds, either waiting for confirmation whether there are genuine buyers after breaking out from $ 1.58 to cash in 15% short term gain.

Those belongs to investor category, this is what I think about the company. After diposing all the non-core assets, the company has done a good job by focusing in two core competencies:

(i) Integrated Facilities Management health care(IFM). Faber provides integrated services such as facility engineering maintenance, central management information, linen and laundry service, cleansing and janitorial services, clinical waste management services and bio-medical engineering maintenance. It's a stable and steady core division of 6-7%/year growth. Their concession renewal due in 2011 but chance of not getting renewal is very remote. Some worried earlier when the present government lost a big chunk of support in last year GE. This division generates about RM 500 mln revenue.

(ii) Property development. The revenue can swing wildly between 150 mln to 200 mln over the last three years.

This is how the revenue breakdown looks like graphically.

If you look at EPS and price chart, it is clearly that the price is catching up with the fundamentals. There was a huge divergence between price and fundamentals in 2008.How should we value the company given the slow growth of health care unit and cyclical property development. Let assume the IFM unit revenue to grow at 6% for the next three years, the revenue should come in around 600 mln. Property division to generate about 200 mln, in 3 years time Faber group should have revenue of 800 mln. Net margin of 9% will give us earning of roughly 72 mln or EPS 0.20. A simple 10 x PE worth RM 2, 12X, RM 2.4 or 15X, RM 3. The reason I am running through multiple PE scenarios is all depending on the "speculation" mood by expanding their value justifications. I can give you 10 reasons why you pay multiple of 6 and 50 reasons of why you should pay 20 times multiple.

It will be very difficult for the share price to come down below $ 1.41 but I certainly will not pay anything above $ 1.60 to generate at least 10-15% per annum over the next three years.

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