Faber's core earnings resilient (ext: InsiderAsia)

The weak property earnings may disappoint investors as this arm had traditionally been highly profitable. Property pre-tax margins averaged between 23% and 33% from 2005 to 2008, while pre-tax profit rose from RM18.7 million in 2005 to RM57.9 million in 2007, before declining to RM34.1 million in 2008.  

However, it can also be argued that Faber has actually read and rode through the earlier property upcycle very well. This is especially so since property has always been a cyclical component to augment its more defensive and resilient facilities management concession business.

With the current property downturn and Faber's cashed-up balance sheet, it is in a good position to scout for opportunities to replenish its land bank.  

Faber has done a good job in restructuring itself, divesting non-core assets, strengthening its balance sheet and improving shareholder returns. The company is in very good shape to ride out the downturn with a strong cash-rich balance sheet and a pool of defensive earnings. 

Its earnings are defensive as they are now almost all derived from facilities management. The facilities management business enjoys steady earnings from organic growth at public hospitals under the concession arrangement, as well as non-concession local and overseas ventures.

The facilities management concession, under FMS, provides defensive income - and yet with decent growth prospects from the hospitals' expansion of space, usage and services. FMS has a 15-year concession until October 2011 to provide facilities management services to 79 government hospitals in the northern states of Perlis, Kedah, Penang and Perak, as well as Sabah and Sarawak.

Faber's shares have rallied strongly over the past two months. Despite that, we maintain our buy recommendation. It should be noted that the Faber of today is a very different corporate entity, in its restructured form. It is focused, boasts defensive earnings, a strong cash-rich balance sheet, high yields and no more risk of shareholder dilution.

At 96 sen, underlying P/Es are inexpensive at 8.7 and 8.1 times for 2009-10, without exceptional gains and assuming much lower property earnings ahead. The stock will trade ex on May 27, 2009 for a four sen gross dividend, giving investors an attractive yield of 4.2%. 

(mailed to members on 22/5 8:50am)