RHB sees value in Fajarbaru Group

Business & Market 2009

Written by Financial Daily

Wednesday, 08 July 2009 10:42

RHB Research has maintained an outperform call on Fajarbaru Builder Group Bhd as it expects the latter’s earnings to exceed street expectations. However, it was staying cautious on the construction sector.

“We expect Fajarbaru to report a net profit of between RM17 million and RM18 million, some 12% to 19% above our forecast and the market consensus of between RM15.1 million and RM15.2 million,” RHB said in a note yesterday in upgrading its net profit forecast for the year ended June 30, 2009 by 15%.

The earnings for the year ended June 30, 2009, is due out by end-August.

RHB pointed out that there would be “lumpy profit recognition” upon completion of two contracts — KTM’s staff quarters and training school in Batu Gajah and the rehabilitation of airfield pavement for parking apron in the Penang International Airport.

The outstanding value for these two contracts were RM5.6 million and RM5 million at the end of its third quarter ended-March 31, 2009.

“We are cautious on the construction sector. However, at between six and seven times fully diluted calendar year 2010 earnings per share (EPS) of 14.5 sen, we see tremendous value in Fajarbaru,” RHB said.

Its indicative fair value for Fajarbaru of RM1.45 is based on 10 times fully-diluted CY2010 EPS of 14.5 sen, which is in line with its one-year forward target earnings multiple for the construction sector of between 10 and 12 times.

Explaining its cautious stance on the construction sector, it said the budget deficit for 2009 and 2010 could exceed 10% of Malaysia’s GDP, should the government fail to cut subsidy when oil revenue falls. This is ahead of the budget deficit level of 7.6% of GDP projected by the government.

“This means the government will now really have to exercise prudence before committing itself to new projects or else Malaysia’s sovereign credit rating may be at risk. Meanwhile, the flow of private sector jobs will remain weak in the absence of funding or reasonably priced funding on the back of the still fragile global credit market,” RHB said.

Still, the research house sees Fajarbaru, which last year bagged the contract for the temporary low-cost carrier terminal (LCCT), as a “strong contender” for “various work packages” of the RM2 billion permanent LCCT at the Kuala Lumpur International Airport (KLIA) in Sepang.

RHB also noted Fajarbaru’s “superior” cash generating ability, citing the latter’s net cash of RM87.6 million or 64.5 sen a share as at end-August.

“We believe this is a result of the highly stringent criteria it adheres to when it comes to bidding for new contracts. Fajarbaru focuses on public jobs as well as work packages from government-controlled enterprises such as Malaysia Airports Holdings Bhd,” RHB said.

Fajarbaru fell 2.5 sen to 93.5 sen yesterday.

This article appeared in The Edge Financial Daily, July 8, 2009.

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Last Updated on Wednesday, 08 July 2009 10:43

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