Fajar ... Feb10

Results Review & Earnings Outlook

 FBB reported a net profit of MYR6.1 mln (+48.2% YoY) for 2QFY10 (Jun.). Cumulative 1HFY10 results were at the lower end of our expectations and accounted for about 45% of our original full-year net profit forecast. The variance was due to slower-than-expected construction revenue recognition and higher-than-expected effective
tax rate of 22.4% (vs. FY10E:20%). This was partially offset by stronger EBIT margin of 16.1% (vs. FY10E:12%). A second single tier interim dividend of 2 sen was declared (FY10 YTD: 6 sen).

 1HFY10 group revenue declined by 18.1% YoY to MYR77.8 mln derived mainly from construction projects such as the Seremban-Gemas Electrified Double Track, Tampin hospital and LCCT expansion works. Meanwhile, the group’s EBIT margin showed
significant improvement (+8.5%-pts YoY to 16.1%). This was offset by higher effective tax rate of 22.4% (+8.5%-pts YoY). The overall net effect was a decline in 1HFY10 pre-tax and net profit by 73% and 56% respectively.

 We have reduced our FY10 and FY11 net profit forecasts by 9% and 5%, respectively as we have: (i) pushed back recognition of construction revenue; (ii) increased our effective tax rate to 22% (vs. 20% previously); offset by (iii) higher construction margins. We expect, however revenue to pick up in the subsequent quarters as projects such as the MYR138.4 mln Tampin Hospital gain momentum.

Recommendation & Investment Risks

 We upgrade our recommendation to Buy (from Hold) with a lower 12-month target price of MYR1.30 (previously MYR1.40) following the recent share price weakness. With the recent decline in share price, the stock is presently trading on projected PERs of 8.2x and 6.7x for FY10 and FY11, respectively, which in our view is undemanding. In addition, we believe FBB’s decent dividend yield of 5.6% in FY10
should provide support to its share price.

 We continue to value FBB based on blended PER target of 9x (unchanged) and P/B target of 1.6x (unchanged) based on our FY10 estimates. We expect FBB’s bid for parts of the new LCCT project including the terminal building (third package) and on-going tenders for about MYR300 mln worth of local jobs to provide potential earnings upside. FBB is a strong contender for the new LCCT given the group’s
involvement in the upgrade and extension works for the existing LCCT.

 The group is in a comfortable position as its outstanding orderbook which stands at MYR370 mln will last until 2012. The group has a healthy balance sheet (net cash of MYR134.7 mln at end-Dec 2009 or 83 sen per share) which will place it in a good position to secure larger projects and diversify into property development.

 Risks to our recommendation and target price include fewer-thanexpected new contracts secured, higher-than-expected material costs and slower-than-expected profit margins for construction projects.