Sunday, January 16, 2011

Faber : An opportunity or catching a falling knife?

This stock has been off my radar since April last year when I sold it for $2.45/share. This stock caught my attention when I saw this on the Edge.

Growing concerns on its earnings prospects sparked heavy selling on Faber Group Bhd shares after the group’s two integrated facilities management (IFM) contracts in Abu Dhabi were not renewed by the authorities in the Gulf.

The news also triggered worries on the renewal of the group’s other contracts locally and abroad resulting in downgrades by investment analysts on the stock.

Faber was the biggest loser on Bursa Malaysia yesterday, plunging nearly 17% or 44 sen to an eight-month low of RM2.19 with 17.7 million shares changing hands. The sharp fall in share price wiped out RM160 million from the group’s market capitalisation.

However, there may be a ray of hope for Faber to win back the contracts later when the authorities open them for re-tendering.

When contacted, an official from Faber explained that the notice of non-renewal of the contracts was due to the changes in the emirates’ Western Region Municipality’s (WRM) management.

The new management is currently reassessing the structure of all the contracts it had awarded earlier, the official told The Edge Financial Daily yesterday.

“Faber is not the only company that was affected, this affects other contractors too,” said the official. “They (WRM) will open for re-tendering again soon and Faber will bid for them.”

On top of that, Faber was working on several other IFM contracts in Abu Dhabi despite the non-renewal of the two existing ones.

The non-renewed contracts included the provisions of civil, mechanical and electrical maintenance services for low-cost houses at Madinat Zayed and Liwa, as well as the improvement, development, upgrade and maintenance of infrastructure facilities and projects at Madinat Zayed-Zone 1.

According to the announcement to Bursa Malaysia, Faber’s on-going job in the emirates included the provision of hospital support services for 12 hospitals and clinics in the UAE worth RM16 million per annum.

Faber said the non-renewal of the contracts would affect its net assets per share (and earnings per share) by about four sen for the financial year ending Dec 31, 2011.

Based on Faber’s issued base of 363 million shares, this works out to RM14.5 million in lost net earnings, although its market capitalisation fell by 11 times that amount yesterday.

For the financial year ended Dec 31, 2010, revenue contribution from the UAE is expected to account for some 25% of the group’s total, the official said.

For the nine-month period ended Sept 30, 2010, these contracts had contributed some RM200 million to Faber’s revenue.

Faber’s local hospital support services (HSS) concession will expire in October this year. A renewal of the concession would provide a major boost for Faber, especially if it comes with a tariff hike.

OSK Research revised its fair value by 15% lower at RM3.39 from RM4 following the news.

“Given that the contracts contribute higher margins, we are subsequently lowering our overall margins assumption for Faber as well as raising our effective tax rate assumption since the UAE contribution was tax-free,” it said.

HwangDBS has also downgraded its recommendation on Faber to “fully valued” from “hold” with target price revised to RM2 from RM2.60 given lack of earnings drivers following the non-renewal of the two major IFM contracts in the UAE.

“Furthermore, the concerns on risk of non-renewal of the HSS concession (locally) could cap upside, said HwangDBS. “While we think this risk is low, Faber has yet to announce any indication of the renewal.”

Another analyst noted that since Faber is a GLC (it is a unit of Khazanah Nasional’s UEM Group Bhd) and its HSS concession has been run very profitably and efficiently, the risks of non-renewal is low.

However, recent news reports suggest that several parties are eyeing parts of the concession, namely the Sabah and Sarawak portions.

Faber’s 15-year HSS concession covers public hospitals in the northern region of Malaysia, Sabah and Sarawak. - by Yantoultra Ngui Yichen,

My comments

Can this be a classic case of over-reaction? The stock has been on the downtrend after it peaked out in September 2010. This was the last straw that broke the camel back. In my view, this correction is overdue.

You can see very extreme valuations. DBS is one of the most negatives that I have seen. They turned very depressive implying the stock worth only RM 2.

OSK on the other hand is rational in its valuation but irrational emotionally. They knew the stock worth around $ 3.39 in the worst case scenario but do not have the conviction to hang on to it, calling it a trading buy.

Assuming both of them are wrong and middle ground of the two is somewhere in $ 2.60/share region.

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