Sunday, December 20, 2009

RM1.85b tag for EONCap (RM6.58) stake

Singaporean Rin Kei Mei and Tan Sri Tiong Hiew King, who collectively hold a 32.57 per cent of EONCap, are willing to sell to Hong Leong Bank, says a BNP analystTwo major shareholders of EON Capital Bhd (EONCap) (5266) are willing to sell their shares to Hong Leong Bank Bhd (HLB) at RM8.20 a share, according to an analyst from BNP Paribas.

That price would be a premium of almost 25 per cent over EONCap's last closing price of RM6.58 on Thursday, giving the group a total value of RM5.68 billion. Singaporean Rin Kei Mei and Tan Sri Tiong Hiew King hold a collective 32.57 per cent of EONCap and the two are willing to sell, BNP analyst Ng Wee Siang said in a note reported by Reuters.

At RM8.20 apiece, HLB would pay about RM1.85 billion for that block. HLB could then push for EONCap to sell its assets, to kickstart a merger between the two banking groups. An asset sale would only require the approval of shareholders with a simple majority of 50 per cent plus one share, Ng said. Ng thinks that other big shareholders like the Employees Provident Fund and Khazanah Nasional Bhd, who hold another 20.7 per cent collectively, are likely to support the deal as their entry investment cost was below RM6 a share.

BNP has raised its target price for EONCap to RM8.30 as it thinks that the takeover of the group would be done at that price. On Thursday, HLB, currently the sixth biggest in terms of assets, received Bank Negara Malaysia's approval to start talks with "certain shareholders" of EONCap, which is ranked seventh.

"(The talks are) for a potential acquisition of the assets and liabilities, including equity interests in EONCap," HLB said in a statement to Bursa Malaysia yesterday. A combination of HLB and EONCap would create a group with total assets of RM121.41 billion. This means that HLB would be able to leapfrog RHB Capital Bhd, currently fourth biggest with assets of RM110.5 billion.


Monday, December 7, 2009

Faber (RM1.49) mulls venturing into healthcare

KUALA LUMPUR: FABER GROUP BHD is toying with the idea of venturing into the healthcare business by owning hospitals in the future to broaden its income streams, said its managing director Adnan Mohammad.

Certainly, Faber is not content with just being the concessionaire for the sanitation and laundry services to the local public hospitals. The group intends to diversify into new businesses as well as to grow its overseas revenues in the Gulf region and India, according to Adnan.

“We are looking at it (building and owning hospitals). We would like to see a lot of non-organic growth and we are not discounting M&As (mergers and acquisitions) to expand the facility management business,” Adnan told The Edge Financial Daily in an interview.

Facilities management business, including laundry and maintenance services, accounts for 84% of its revenue. Faber, which is also a property developer, holds a 15-year concession ending October 2011 to offer services to 79 government hospitals in Perlis, Kedah, Penang and Perak, and East Malaysia.

According to analysts, Faber had in October submitted its application for a renewal of the concession, and its status would only be known in October next year. Besides the government concession, Faber also has operations in the United Arab Emirates (UAE) and India. Currently, only 5% of the group’s revenue is derived from overseas.

For the nine-month period ended Sept 30, Faber recorded a lower pre-tax profit of RM74.6 million against RM81.7 million in the previous corresponding period. Revenue was also lower at RM509.2 million compared with RM518.2 million previously.

Abroad, Adnan said Faber’s track record in the UAE would serve as a springboard for it to tap into the other Gulf Cooperation Council (GCC) countries. Last month, Faber announced that it had secured an infrastructure facilities management contract from the Department of Municipal Affairs of the Western Region Municipality (WRM) in Abu Dhabi. The job with an estimated annual contract price of AED154 million (RM141.8 million) may be extended at WRM’s discretion.

A few months earlier, WRM had awarded Faber two jobs of equal value with a combined worth of RM65.6 million where the Malaysian company would offer civil, mechanical and electrical maintenance services for low-cost houses in Abu Dhabi.More jobs are on the cards for Faber in the UAE. According to Adnan, the firm is bidding for a three-year hospital facilities management job in Abu Dhabi.“It’s quite sizable,” he said without elaborating. In India, Faber has a presence in New Delhi, Hyderabad and Chennai. It is also hoping to secure more airports contracts for electrical and sewerage maintenance services.

On its property development business, Faber’s real estate operations in Malaysia are also expanding. Adnan said Faber planned to launch some RM500 million worth of PROPERTIES [] in the Klang Valley next year. These include semi-detached and bungalow units under phase four and five of its Laman Rimbunan project in Kepong, besides landed residential entities under its phase 1A (Fleet) project within the Taman Desa enclave.

The property developer, with about 37 acres of undeveloped land across the Klang Valley and Sabah, is also eyeing opportunities in Johor Bahru, and Penang. “We are not discounting the major cities, such as Penang and Johor Baru,” Adnan said, adding that the company’s focus would still be in the Klang Valley. Faber hopes to secure more joint ventures with landowners, an expansion method deemed more economical compared to land acquisitions by the developer.

Shares of Faber had gained 109% so far this year, outperforming the 45% rise on the FBM KLCI. OSK Research Sdn Bhd analyst Norfauzi Nasron foresees, better financials for Faber from FY09’s fourth quarter onwards as the company continues expanding its facilities management business abroad.

The analyst said the expected renewal of Faber’s 15-year concession with government hospitals would allow the company to propose new prices for its facilities management services, as current rates have not been reviewed despite operating expenses having risen over the last 12 years.

“We reiterate our view that it is highly unlikely for the (15-year) concession (in Malaysia) not to be renewed given the substantial investments poured into it since the concession started, and the fact that Faber has the expertise and track record in the provision of such services,” Norfauzi wrote in a note to clients last Friday.

OSK is maintaining its earnings forecast for Faber, and fair value of RM2.15 for the company’s shares. The research house also retained its buy call on the stock. Based on Faber shares’ closing price of RM1.40 last Friday, the stock was trading at a price-to-earnings ratio (PER) of 8.71 times and price-to-book ratio of 1.6 times. The industry’s average PER stands at 14.31 times.

Source: The Edge

SAAG (RM0.175) secures US$120m Bangladesh power projects

KUALA LUMPUR: SAAG CONSOLIDATED (M) BHD has secured two projects to build power stations in Bangladesh with a total contract value of US$120 million. SAAG said on Friday, Dec 4 it had accepted a letter of award from Garisan Etika Bangladesh (Pvt.) Ltd to be the engineering, procurement and construction contractor for the power plants at the Adamjee Export Processing Zone, Bangladesh. The projects involved six 6MW power plants and two 34MW combined cycle plants to be built at the zone. SAAG said the agreed execution period was 15 months from commencement of the project works. The Project Sum shall be paid progressively over the project period. The project will be funded through bank borrowings, internally generated funds and/or corporate exercises.

Source: The Edge

Should have some run-up in share price as investors have been waiting for the announcement of this project award following SAAG's increase in inventories to RM332.7mil @ Sept 2009 from RM1.2mil @ Dec 2008 to procure turbo machinery/rig equipments funded by short term borrowings. Failure to secure this award could bring dire consequences to the company. Anyway, I think this one is somewhat similar to EPCC projects handled by Mudajaya. Should command higher margins I suppose. By simple calculation, US$120mil (RM408mil) over 15 months and net margin of 10%, net profit from this award could be RM32.6mil p.a. or EPS of 2.8 sen. If net margin of 5%, EPS will be 1.4 sen. Just by attaching a PER of 5x to earnings from this project should add at least 7 to 14 sen to its share price already. Worth a bet since its share price has been beaten down from 40 sen since May to a pathetic 17.5 sen currently.

Share Capital: 1,174.7mil
Mkt Cap: RM205.6mil

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Sunday, December 6, 2009

Faber Group (RM1.40): A cheap bargain

Faber Group is principally involved in two main businesses, namely Integrated Facilities Management (IFM) and property development. Khazanah is currently the largest shareholder with an equity stake of 34.3% in Faber Group followed by Universal Trustee with an equity stake of 23.4%. Having the status of GLC (Government Linked Company), the company is poised to benefit from the potential consolidation of the healthcare sector, including possible M&A involving Faber Medi Serve and Pantai Medivest, both of which Khazanah is holding a substantial stake.

Integrated Facilities Management:
This division is currently the largest contributor to Faber's performance, accounting more than 80% of its revenue and net profit respectively while the remaining comes from its property development division. Its IFM consists of two divisions, namely healthcare and non-healthcare. Bulk of the revenue is from healthcare division, which provides services such as central management information, facility engineering maintenance, linen and laundry service, cleansing and janitorial service, clinical waste management and biomedical engineering maintenance. It is currently servicing 79 hospitals in Northern region of Peninsula Malaysia, East Malaysia, UAE and India. The company is holding a 15-year concession to service government hospitals which will expire in 2011. Faber most likely will be able to renew the contract in view of its track record and expertise in this area coupled with the fact that it's being held by Khazanah.

For 9 months ending Sept 2009, Faber has already recorded RM49mil net earnings just from this division alone. This division's net profit was RM43.5mil and RM38.3mil for FY2008 and FY2007 respectively. On top of that, it's recently awarded on 23rd Nov 2009 by Abu Dhabi government for improvement, development, upgrading and maintenance of infrastructure facilities and projects at Madinat Zayet, Abu Dhabi worth RM142.1mil p.a. with an option to extend its services by 1+1+1+1 years, which could further boost its earnings in 2010. Assuming net margins of 10% which is in line with Faber's historical margins for its IFM business, it will add RM14.2 mil to its earnings. Therefore, this division could hit more than RM70mil p.a. quite easily.

Property Development:
Its property division rebounded quite strongly with its revenue increasing from RM6.2mil in 1Q2009 only to RM42mil in 3Q2009. Consequently, it registered net profit of RM6.1mil and RM3mil for 3Q2009 and 2Q2009 respectively after two consecutive quarters of losses of RM1.2mil and RM9.3mil in 1Q2009 and 4Q2008 respectively, backed by its encouraging sales of its two ongoing projects, Laman Rimbunan, Kepong and Tmn Hilltop, Kota Kinabalu. Going forward, the company could be launching its exclusive residential project at Tmn Desa worth about RM170mil starting 3Q2010 which is timely as its current unbilled sales is estimated about RM90mil which could last until next year only. Currently, Faber owns about 40 acres of land worth RM700mil and is looking for new landbank via outright purchases or via JV with landowners.

Attractive. Assuming property earnings of RM15mil on the back of RM150mil revenue, in addition to RM70mil earnings from IFM, its net profit could reach RM85mil, translating into EPS of 23.4 sen. For conservative sake, by attaching 8x to PER 2010, its share price could reach RM1.87. At current price of RM1.40, it's still trading at 6x only, which is a huge discount considering its stable income from IFM business and recovering property earnings which should command higher PER. Price triggers include stronger quarterly earnings and more potential IFM awards coming from UAE or India. It has a strong balance sheet with net cash of about RM100mil @ Sept 2009, equivalent of 27.5 sen per share.

Share capital: 363mil
Market Cap: RM508.2mil
Net Profit for 2009 and 2010: RM60mil and RM85mil
EPS for 2009 and 2010: 16.5sen and 23.4sen
PER 2009 & 2010: 8.5x and 6.0x
Net Cash: RM100mil
Div Yield: 3.6%

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Tuesday, December 1, 2009

Something on exit strategy

As we hear from recent news on countries such as G20 planning exit strategies for their respective stimulus packages costing trillions of US$ which helped their economies navigate out of the woods, this actually raise concerns among investors over the adverse implications that might befall the capital markets again. This shouldn't be a surprise as countries in the past have executed wrong policies which plunged their economies into recession again like what happened in Japan during 1990s and US in 1937-38. There are also some investors who are concerned that the impending exit strategies might include immediate interest rate hikes.

My opinion is that the tightening policies will be in a gradual and sequential manner and the governments cannot afford to repeat the mistakes made in the past. To recap, US actually doubled the reserve requirement in 1936-37, raised interest rates, cut fiscal spending and began collecting security taxes all at about the same time, resulting in much of the stimulus disappeared in a hurry. This plunged the economy into recession again in Sept 1937. In a similar situation, Bank of Japan hiked up interest rates in 1989 from 2.5% to 6% within a year, resulting in a recession that never quite pick up right until now.

Exit Strategy:
Just recently in an article by Ben Bernanke in Wall Street Journal, he mentioned 5 measures for US exit strategy as follow:
1. To raise the interests paid on banks reserves balances at the Fed
2. To arrange large scale reverse repurchase agreements
3. Treasury sells bills and deposits the proceeds with the Fed Reserves
4. To offer term deposits to banks to lock up banks reserves held at the Fed
5. To sell a portion of its long term securities to the open market if necessary

All these measures have an aim: To absorb the massive liquidity injected into the market and to control the excess reserves brought by quantitative easing programme. Despite the liquidity injection by the Fed to normalize the credit market, the banks are not so keen to lend out to the market but tend to put back into the Fed account, resulting in a sudden spike in excess reserves from an insignificant amount in Sept 2008 to US$1trillion in Nov!! If the market recovers again, the gigantic excess reserves could have a money multiplier effect which would cause disastrous consequence. On that note, it is imperative for US government to withdraw these stimulus measures and normalize the financial market again.

Interest Rate Hike:
What about interest rate hikes in US? I think this will still be a distance away for US as the economy remains fragile, unemployment rate remains high, CPI still negative while domestic demand remains weak. Only very few countries can afford interest rate hikes such as Australia and Israel. Australia raised interest rate by 3 times within the last two months to 3.75% from 3%. Until and unless these numbers start improving in US, interest rate hike will not happen. Some estimated that they'll only raise it in 3Q2010 or 4Q2010.

From the graph above, unemployment rate and interest rate movement are inversely proportional to each other while interest rate movement is lagging behind CPI and utilization rate. With unemployment rate expected to remain high even for the rest of 2010 coupled with deflationary environment and low domestic demand, interest rate hike might not happen in the near term or until after financial markets could function normally again without the excess liquidity in the market brought by the stimulus measures.

Impact to equity market?
Some argue that interest rate hikes will adversely impact the equity market. The reason being it will restrict money supply and liquidity in the market will be limited, thus putting downward pressure on the equity market. However, the last 2 interest rate hike cycles in US were showing quite the contrary.
The interest rate hike seems to be following the trend of the equity index. This might be because interest rate hikes usually occur during the late recovery and expansionary stage where corporate earnings start growing again (the main determinant of equity prices in the long run).

Hmmm, so, will there be another second dip? It will depend on how wise the governments are in altering the fiscal and monetary policies in tandem with the economic conditions. For me, there's a low likelihood of it occurring again and governments cannot afford to repeat mistakes made in the past again. Exit strategies for the stimulus packages are expected to be gradual as well and will not be immediate. Slow recovery ahead...