FAVCO (7229) - Favelle Favco Berhad (Stock Code-7229): A Safer Bet For Oil & Gas Exposure? - bullbearbursa
With the recent OPEC’s agreement on production cut, the market is now
starting to price in a prospect of a better supply dynamic moving
forward, with oil prices surging cross the USD50/bbl mark. In this
regard, it could be timely for investors to relook some of the oil &
gas related stocks listed on our local bourse. Of many, Favelle Favco
Berhad could be an interesting stock that is worth exploring.
Company Background
Favco is a manufacturer of construction cranes and product lines include Tower Cranes, Offshore Cranes, Crawler Cranes and Wharf Cranes. The company operates under two brands (Favelle Favco and Kroll) and reported to have the largest hammerhead crane and luffing tower crane in the world. It has four manufacturing facilities in Malaysia, Denmark, USA and Australia with 700 workforce. Impressively, the company has demonstrated a proven track record by having constructed some of the worlds’ tallest buildings ever built.
Chart 1: Plants and Completed Project of Favelle Favco
Source: donkeystock.biz, BullBearBursa compilations as 3/12/2016.
Key Investment Considerations:
1) Possible Turnaround In The Oil & Gas Sector
While the group has not reported the breakdown of its revenue by product lines or industries, it is known that the group has a huge exposure in the oil and gas sector via its offshore and subsea cranes. This is evidenced via a shrink in orderbook from an all time high of RM1,091 million (as of 18 November 2014) to the current RM634 million (as of 22 November 2016), in line with the slump in oil prices since late-2014. While it could be too early to be optimistic, the recent OPEC agreement on production cut may imply the worst for oil prices is now behind us and a gradual resumption in oil & gas activities is likely. This should help the group to replenish its orderbook, mitigating some downside risks for its revenue in the future. Near term risk is also being covered by the current orderbook of RM634 million, which could last until the end of 2017.
2) Net Cash Company; Strong Cash Generating Ability
Since 2010, the group has been in a net cash position. As of 30 September 2016, the cash and cash equivalents is standing at 331 million-approximately 65% of the total market capitalization of the group. This is in regards with the strong cash generating ability and reasonable CAPEX requirements of the group, allowing the group to generate ample free cash flows and keeping borrowings in check over the past 5 years. While the slowdown in the oil & gas sector has affected the group’s financials, it is important to note that the group is still generating positive free cash flows in 9M16 (albeit lesser than before). This should ensure a sustainable dividend payout without putting too much pressure on its balance sheet.
Chart 2: Ample Cash Balance
Source: company’s reports, BullBearBursa compilations as 3/12/2016.
3) Undemanding Valuation With Decent Dividend Yield
After the slump in oil prices in late-2014, Favelle Favco saw de-ratings in terms of PE valuation. With oil prices look to be bottomed, risk for further contractions in PE valuation should be somewhat low. The group is currently trading at 6.4X PE ratio, which is slightly lower than its historical average PE ratio of 6.7X, offering a fair entry point for this stock. Assuming a dividend payout of 30% and a 20% decline in EPS, it is possible for the group to payout a dividend of 10 cent per share, considering its ample cash holding right now. That should translate into a dividend yield of 4.3%, which could offer some comforts for investors that are hoping to hold this stock for a turnaround play.
Chart 3: Price and PE ratio for Favelle Favco
Source: Bloomberg, BullBearBursa compilations as 3/12/2016.
Conclusion:
With improving prospect for better oil prices ahead, one might be tempted to buy into oil & gas stocks to bank on the turnaround in the sector. In this regard, Favelle Favco looks to be a safer bet, given its ample cash holdings (approximately 65% of its market cap), strong cash generating ability, proven track record and undemanding valuation. In addition, it is also hard to find company with a huge exposure in the oil & gas sector that could still payout reasonable amount of dividends in this challenging environment. If you are a patient investor with a long investment horizon (3 to 5 years) and looking for a turnaround play in oil & gas sector, this might be a stock you are looking for.
Table 1: Key Financial Highlights
Source: company’s reports, BullBearBursa compilations as of 3/12/2016.
Disclaimer: The views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.
FAVCO (7229) - Favelle Favco Berhad (Stock Code-7229): A Safer Bet For Oil & Gas Exposure? - bullbearbursa
http://www.en.bullbearbursa.com/2016/12/04/favelle-favco-berhad-stock-code-7229-a-safer-bet-for-oil-gas-exposure/
Company Background
Favco is a manufacturer of construction cranes and product lines include Tower Cranes, Offshore Cranes, Crawler Cranes and Wharf Cranes. The company operates under two brands (Favelle Favco and Kroll) and reported to have the largest hammerhead crane and luffing tower crane in the world. It has four manufacturing facilities in Malaysia, Denmark, USA and Australia with 700 workforce. Impressively, the company has demonstrated a proven track record by having constructed some of the worlds’ tallest buildings ever built.
Chart 1: Plants and Completed Project of Favelle Favco
Source: donkeystock.biz, BullBearBursa compilations as 3/12/2016.Key Investment Considerations:
1) Possible Turnaround In The Oil & Gas Sector
While the group has not reported the breakdown of its revenue by product lines or industries, it is known that the group has a huge exposure in the oil and gas sector via its offshore and subsea cranes. This is evidenced via a shrink in orderbook from an all time high of RM1,091 million (as of 18 November 2014) to the current RM634 million (as of 22 November 2016), in line with the slump in oil prices since late-2014. While it could be too early to be optimistic, the recent OPEC agreement on production cut may imply the worst for oil prices is now behind us and a gradual resumption in oil & gas activities is likely. This should help the group to replenish its orderbook, mitigating some downside risks for its revenue in the future. Near term risk is also being covered by the current orderbook of RM634 million, which could last until the end of 2017.
2) Net Cash Company; Strong Cash Generating Ability
Since 2010, the group has been in a net cash position. As of 30 September 2016, the cash and cash equivalents is standing at 331 million-approximately 65% of the total market capitalization of the group. This is in regards with the strong cash generating ability and reasonable CAPEX requirements of the group, allowing the group to generate ample free cash flows and keeping borrowings in check over the past 5 years. While the slowdown in the oil & gas sector has affected the group’s financials, it is important to note that the group is still generating positive free cash flows in 9M16 (albeit lesser than before). This should ensure a sustainable dividend payout without putting too much pressure on its balance sheet.
Chart 2: Ample Cash Balance
Source: company’s reports, BullBearBursa compilations as 3/12/2016.3) Undemanding Valuation With Decent Dividend Yield
After the slump in oil prices in late-2014, Favelle Favco saw de-ratings in terms of PE valuation. With oil prices look to be bottomed, risk for further contractions in PE valuation should be somewhat low. The group is currently trading at 6.4X PE ratio, which is slightly lower than its historical average PE ratio of 6.7X, offering a fair entry point for this stock. Assuming a dividend payout of 30% and a 20% decline in EPS, it is possible for the group to payout a dividend of 10 cent per share, considering its ample cash holding right now. That should translate into a dividend yield of 4.3%, which could offer some comforts for investors that are hoping to hold this stock for a turnaround play.
Chart 3: Price and PE ratio for Favelle Favco
Source: Bloomberg, BullBearBursa compilations as 3/12/2016.Conclusion:
With improving prospect for better oil prices ahead, one might be tempted to buy into oil & gas stocks to bank on the turnaround in the sector. In this regard, Favelle Favco looks to be a safer bet, given its ample cash holdings (approximately 65% of its market cap), strong cash generating ability, proven track record and undemanding valuation. In addition, it is also hard to find company with a huge exposure in the oil & gas sector that could still payout reasonable amount of dividends in this challenging environment. If you are a patient investor with a long investment horizon (3 to 5 years) and looking for a turnaround play in oil & gas sector, this might be a stock you are looking for.
Table 1: Key Financial Highlights
Source: company’s reports, BullBearBursa compilations as of 3/12/2016.Disclaimer: The views above are opinions based on facts and subjective judgements. We do not take any responsibility for any actions rely on the information discussed.
FAVCO (7229) - Favelle Favco Berhad (Stock Code-7229): A Safer Bet For Oil & Gas Exposure? - bullbearbursa
http://www.en.bullbearbursa.com/2016/12/04/favelle-favco-berhad-stock-code-7229-a-safer-bet-for-oil-gas-exposure/
