Faber ... May10

S & P Results Review & Earnings Outlook

 Despite Faber’s 1Q10 net profit of MYR14.4 mln (+97.3% YoY) just reaching 12.6% of our previous 2010 forecast, it was broadly in line as we expect earnings to improve in upcoming quarters when new property sales are recognized. Revenue of MYR183.9 mln (+30.6% YoY) was also broadly in line with expectations.

 Faber’s lower-than-expected earnings were mainly due to a wider LBIT of MYR1.7 mln (vs. LBIT of MYR0.3 mln in 1Q09) incurred by its property development unit as most of its projects are completed. The performance of its facilities management division (FMS), however, was above expectations with EBIT rising 63% YoY to MYR29.2 mln on
higher variation orders and new contracts in Abu Dhabi.

 Despite the lower-than-expected 1Q10 earnings, Faber’s earnings should improve in the upcoming quarters with the renewal of a MYR65.5 mln FMS contract for low cost houses in Abu Dhabi. Domestic FMS earnings will also be boosted by services for three new government hospitals. Earnings from its property development division
are expected to recover over the next two years with the launch of MYR500 mln worth of new high-end properties in the Klang Valley. Sales of its newly launched bungalows and semi detached units in Taman Danau Desa, Kuala Lumpur are already 60% sold and should contribute to the group’s earnings in the upcoming quarters.

 After tweaking some of our assumptions, we lower our 2010 net profit estimate to MYR111.0 mln (from MYR114.2 mln), but raise our 2011 net profit forecast to MYR136.1 mln (from MYR135.3 mln).

Recommendation & Investment Risks

 We maintain our Buy recommendation on Faber and lift our 12-month target price to MYR2.60 (from MYR2.10).

 Our target price remains derived from a sum of parts valuation. We ascribe target PER multiples of 7x (unchanged) and 6x (from 5x) to its 2011 (rolled over from 2010) FMS and property earnings respectively. The target PER multiple of its FMS unit is similar to the implied PER paid in the acquisition of the remaining 30% stake in Faber Medi-Serve. Meanwhile, we raise the target PER multiple of its property
division for the improving earnings outlook that also remains within the 5x-7x peer average range for small developers in our coverage. Our target price also includes an unchanged net DPS estimate of 4.5 sen.

 We continue to like Faber for the improving outlook of its FMS operations that has been strengthened by its overseas contracts. We believe more FMS contracts in the Middle East and India could be forthcoming as it has build up a strong reputation. Furthermore, its property development division is set for a faster recovery after it
registered strong take up rates for its recent launches. Its prospective 2010 and 2011 PERs of 7.4x and 6.0x also remains attractive relative to the earnings growth of 34.2% and 22.6% on offer respectively.

 Risks to our recommendation and target price include: (i) rising cost affecting the margins of its FMS operations, (ii) inability to renew its concession agreement to provide FMS to government hospitals and contracts in Abu Dhabi, and (iii) delays in its property launches.