Tuesday, January 18, 2011

Faber ... Jan11

Faber Group Bhd’s subsidiary Faber LLC has received non-renewal notices for three maintenance services contracts worth a total of RM184 million in Abu Dhabi from the Emirate’s Department of Municipal Affairs, Western Region Municipality.

The non-renewal of the contracts will affect Faber’s earnings and its net assets per share of four sen for the financial year ending Dec 31, 2011.

With regard to the operational impact, Faber LLC needs to redeploy its staff and assets that are presently assigned to the projects and it will continue to maintain the office in the region for other potential contracts.

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.

Faber’s services for the low-cost house contracts will cease with effect from April 2 2011, while its services for the maintenance of infrastructure facilities at Madinat Zayed-Zone-1 will expire on June 1 2011.

Going forward the non-renewal of the contracts will dampen sentiment and create some uncertainty over the fate of Faber’s existing concession in Malaysia.

Nevertheless, with Abu Dhabi’s Western Region Municipality (WRM) expected to invite a fresh round of tenders for its infrastructure contracts, the potential upside catalyst for Faber would be the possibility the company secures new contracts from WRM.

Another catalyst would be the renewal of its concession in Malaysia which could possibly be announced anytime.

Going Forward …

Its earnings growth prospects concerns were raised 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.
However, there may be a ray of hope for Faber to win back the contracts later when the authorities open them for re-tendering.

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.

Faber is not the only company that was affected, this affects other contractors too. 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.

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.

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.

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. 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 2011. A renewal of the concession would provide a major boost for Faber, especially if it comes with a tariff hike.

The concerns on risk of non-renewal of the HSS concession (locally) could cap upside. While this risk is low, Faber has yet to announce any indication of the renewal.

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.

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