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Thursday, April 24, 2014

Faber set to be transformed into biggest AFM company in Malaysia (Edge)

Maintain buy with target price of RM3.61: Following Faber’s announcement on April 18 that it has entered into a conditional share sale agreement with UEM Group Bhd (UEMG) with regard to the proposed acquisition of Opus Group Bhd and Projek Penyelenggaraan Lebuhraya Bhd (Propel) for RM1.151 billion, its share price entered into new territory, breaking the RM3 threshold and closing at a 52-week high on April 22.

The stage is set for Faber to be transformed into the largest asset and facility management (AFM) company in Malaysia with a more diversified revenue base in the healthcare, infrastructure and commercial sectors.

Expect the rally in the share price to continue in this short term.

The proposed merger is conditioned upon: (i) signing of concessionaire agreement between Propel and Projek Lebuhraya Usahasama Bhd for the maintenance of its highway; and (ii) signing of a supplemental agreement between UEMG and Propel under which Propel will continue to be nominated as master contractor for the maintenance of the PLUS highway. The signing of the agreements will lock Faber’s future earnings for a period of at least 20 years, especially as the agreed new rates will not be less favourable than the existing ones.
Barring any material circumstances, we believe that the conditions for the proposed merger were negotiated earlier and can be fulfilled. We also expect the shareholders to give the green light for the proposed merger due to its earnings accretive impact.

On this note, we opine that the proposed deal could be completed as fast as in three months time (after taking into account the time needed to secure the required regulatory approvals).

Net cash for the enlarged Faber group will stand at approximately RM245 million or 30 sen per share after the merger. The demand for capital expenditure (capex) for the enlarged Faber is not expected to be high, reflecting the nature of the business. We estimate that the annual capex requirement for the enlarged Faber will be in the region of RM50 million in the first few years, before it embarks on a new growth initiative.

Faber has a proclivity to return cash to shareholders as evidenced by generous dividends made in the past. On this note, we believe that the company could utilise the cash to reward its shareholders in the form of a special dividend.
We are adjusting our financial year 2014 ending Dec 31 (FY14) numbers as the merger is only expected to be competed in the second half of FY14. We expect 2014 earnings per share (EPS) to be 15.7 sen after taking into account the timing of revenue recognition from Opus and Propel.

However, this will not affect our valuation as we are rolling forward our valuation horizon to FY15.

We reaffirm our target price of RM3.61, pegging the group’s post-merger 2015 EPS of 26.4 sen to 2015 price-earnings ratio of 13.7 times. — MIDF Research, April 23

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