Faber Group Bhd Another Dark Horse?

INVESTMENT MERIT

- Raising target price to RM1.81. Faber has performed well since our first recommendation on 27 Sept 2012. The stock has surged 16.3% since and surpassed our initial target price of RM1.41. Despite there being no conclusive outcome on its concessions renewal, we believe that the market has started to price in gradually a higher probability of it getting the concessions renewed into the share price. To recap, we had earlier indicated that the stock could be rerated to RM1.81 at the least, implying 9.0x FY13 PER, should the concession be renewed.  

- Concessions renewal the major re-rating catalyst. It was reported that the upcoming year would be exciting for the group on the back of the possible securement of its hospital support service concession deal with the government by this year-end. We believe the chance of renewal is high based on Faber’s sound track record with the government. For instance, two other concession holders – Pharmaniaga and Padiberas – have managed to secure their concession renewals with the government of late. Besides, with the drive from its major shareholder, Khazanah Nasional (which is the largest shareholder of Faber with a 34.3% stake), we believe this will, to a certain extend, increase its chance of getting the concession renewed. 

- Potential synergies at the shareholder level? Moreover, Khazanah Nasional also owns a 45.7% stake in IHH Heathcare Bhd. In view of the common shareholder and the fact that Faber is to expand its nonconcession Integrated Facilities Management service, we do not rule out the possibility of creating potential synergies in  the future between the two companies.  

- Net dividend yield remains decent despite the recent rally. Faber has been paying 8 sen GDPS for the last two financial years, translating into payout ratios of 27.6%-35.4%. We have highlighted earlier that the group plans to increase its dividend payout after paring down its RM77.58m loan stocks in 3Q12. Based on our cashflow projections, we believe that the group is able to increase its gross DPS to 10 sen, or 7.5 sen net, translating into a net yield of 5.0% or a payout ratio of c. 40%. 

- One of the cheapest healthcare stocks listed on Bursa. Faber is currently trading at 8.8x FY11A PER and 7.8x FY12E  PER, which are undemanding compared to the small cap healthcare and waste management stocks’ FY11-FY12 PER of 9x-10x. The recent inclusion of IHH Healthcare into the FBMKLCI has boosted the sector’s valuation. Faber, being one of the cheapest healthcare stocks  in Bursa Malaysia, could potentially benefit from this index rebalancing in our view. 

- Reiterate our Trading Buy call with a higher target price of RM1.81. 

TECHNICALS

- Resistance: RM1.52 (R1), RM1.61 (R2), RM1.66 (R3)

- Support: RM1.41 (S1), RM1.36 (S2), RM1.27 (S3)

Comments:  Faber’s share price has broken out from its multi-year downtrend line formed since Sept. 2010 last week. While the company’s chart appears bullish, its 14-day RSI is approaching the overbought territory, suggesting a potential consolidation/pullback is imminent.   

BUSINESS OVERVIEW

Faber Group Bhd was formed through a merger between Merlin Hotels Malaysia Bhd and Faber Union Sdn Bhd in 1972 and later established as Faber Group in 1990. It is now a leading player in  the Integrated Facilities Management (IFM) and has expanded into the Property Development Sector.

The group provides IFM services to hospitals, commercial and residential properties both in the public and private sectors and is Malaysia’s largest Hospital Support Services company for over 70 government hospitals and 400 healthcare institutions. 

It also has a growing property solution division that has established itself in the Taman Desa development region and is now actively expanding its portfolio. Faber Group currently extends its services to hospitals and hotels in Singapore, Indonesia, Dubai, Abu Dhabi and several parts of India.

BUSINESS SEGMENTS

Integrated Facilities Management: Biomedical engineering maintenance services, Cleansing Services, Clinical Waste Management Services, Facility Engineering Maintenance Services, Linen and Laundry Services, Maintenance Management Information Systems

Property Development: Condominium, Commercial and Residential developments. Completed portfolio includes developments in Taman Desa (current projects are Armada Villa and Villa Prima); Laman Rimbunan, Kepong (Areca Residence) and East Malaysia.

Source: Kenanga