Fajarbaru Builder - Slow recovery, earnings disappoints

Period  2Q13/6M13

Actual vs. Expectations  The reported 6M13 net profit of RM1.7m came in way below our expectations, accounting for only 12% and 16% of ours and the street’s full-year estimates of RM11.2m and RM10.8m respectively due to the delays in its construction activities.

Dividends  No dividend was declared during the quarter as expected.

Key Results Highlights  QoQ, Fajar’s earnings improved by 16% from RM0.6m to RM0.7m on the back of the growth in its revenue of 16%. This was mainly due to a higher revenue recognised from its delayed construction projects earlier as works started to pick up pace.

 YoY, the revenue slid by 34% to RM70.2m due to the delay in site possession for the Gleneagles hospital project LRT depot works coupled with its depleting order book replenishment. The drop in revenue has cut the net profit by 51% to RM0.7m. The net margin was also down to 1.9% from 2.6% previously due to a higher operating cost.

Outlook  Moving forward, while there is lower visibility in its order book replenishment in the near term, Fajar will be focusing on executing its c.RM800m outstanding order book, which could probably underpin its earnings visibility for another three years.

Change to Forecasts  Nonetheless, we have further slashed our FY13 earnings estimates by 38% from RM11.2m to RM6.9m as we expect more margin compression at its construction projects as it continued to roll along at a slower pace.

 Going into FY14, we would expect a better earnings recovery from Fajar as we believe that it would be able to go on a full swing execution of its remaining order book of c. RM800m. Hence, we are maintaining forecast for FY14.

Rating   Maintain UNDERPERFORM

 We are maintaining our UNDERPERFORM recommendation as our new Target Price below is substantially below the current share price.

Valuation  We are maintaining our Target Price of RM0.51 based on an unchanged 5.0x PER pegged to its FY14E EPS.

Risks  Delay in LRT works by the main contractors.

 Escalating building material prices.

Source: Kenanga