FAVCO (7229) - Quarterly Result (Malaysia) – Favelle Favco Berhad (Q4 FY16) - Jackson Yuen

FAVCO (7229) - Quarterly Result (Malaysia) – Favelle Favco Berhad (Q4 FY16) - Jackson Yuen

Last Traded Price

	RM 2.69
Previous Price	RM 2.31
Target Price	RM 2.84
Est. Return	+5.6%
Rating	Neutral (maintained)
Price to Earnings*	7.57x
Price to Cash Flow*	6.79x
Price to Book*	1.04x

** As of 24/02/17 (Source: Morningstar)
Although the revenue decreased by 25.7% QoQ, net income only declined by 21.4% which reflects better profit margin. Previous quarter’s income was boosted by RM 13m finance income (Q4FY16: RM2m), excluding it (as it is not relating to the underlying operating activity), current quarter’s net income should be around RM 16.43 (Q4FY15: RM 10m), holding everything constant, which reflects an increase of 64% QoQ. Overall, we are not too keen to compare the financials with the previous quarter as it is widely-known fact that recent financials were significantly weaker than preceding year(s), and the share price has reflected it, hence any comparison (in absolute terms) is quite meaningless in our opinion.
When we assess the relative performance (QoQ) using percentages, the followings were observed:

• Operating margin: 12% (Q4FY15: 7.3%)
• Net Profit margin: 13.6 (Q4FY15: 12.9%)
• Operating cash flow margin: 77.3% (Q4FY15: 87.2%)
• Fund from operation (FFO) margin: 82.9% (Q4FY15: 78.5%)
• Free cash flow margin: 49.8% (Q4FY15: 65.3%)

The weaker free cash flow was due to substantial capital expenditures, increase from RM 24.4m to RM 45.2m (+85%). Despite the weaker cash flow, free cash flow of RM 68.1m still translates into free cash flow yield of 11.5%.  We continue to like Favco as it has a strong cash flow generating ability (at least compared to the stocks that we currently cover). To demonstrate our point, we believe the most appropriate cash flow is FFO since free cash flow is temporarily weakened by the Capex, FFO / Net Income is at 6.08x (FY15: 6.10x), suggesting that for each profit generated, the actual cash from the underlying operations is 6x of the profit (ignoring the effect of working capital).
From the quarterly report, we noted that the dividend coverage based on cash flow has weakened from approx. 5.5x to 2.6x, but it is within an acceptable range. The announcement of a dividend of 15sen will translate into 5.8% yield (subject to shareholders’ approval) based on yesterday’s closing price of RM 2.69.

With the pleasant oil price environment, which seems to sustained at above USD 55, we may see a boost in O&G Capex. Indeed, companies such as Whiting Petroleum Corp has stated its intention of increasing 2017 Capex by double which we believe many will start to follow in the near-term.

On top of that, regional infrastructure will be another key engine for growth led by AIIB.
Summary
We view the future prospects of the company quite favourably with its high cash generative business. We have recently performed a relative valuation on Favco which suggests a target price of RM 2.84, implying an upside potential of c. 6% based on its previous closing price. We have not changed our valuation assumptions given the share price has surged from around RM 2.30 to RM 2.69 (+17%), with its dividend distribution (around 5.8% yield), we may see the share price trading sideway for a while. We maintained a Neutral rating on Favco.
Disclaimer: The views above are opinions based on facts and subjective judgements. Yield Mountain (including the contributors) does not take any responsibility (be in monetary or non-monetary) for any actions rely on the information discussed.

FAVCO (7229) - Quarterly Result (Malaysia) – Favelle Favco Berhad (Q4 FY16) - Jackson Yuen
http://www.yieldmountain.com/2017/02/24/quarterly-result-malaysia-favelle-favco-berhad-q4-fy16/