Faber Group Bhd
(March 17, RM2.01)
Maintain buy at RM2, target price raised to RM2.75: Since the news regarding the potential sale of Pantai Medivest and Pantai Fomema emerged, Faber has been linked as the likely buyer.

Although Faber’s management neither deny nor confirm the rumours, we believe the purchase of the Pantai companies is relevant to Faber’s business model which could potentially create synergy to the company.

Faber’s profits could potentially be boosted by 50% from this acquisition depending on the pricing. Regardless of the outcome of the potential deal, fundamentally we continue to favour Faber for what it is today.

As such we maintain our buy recommendation at a higher target price of RM2.75 from RM2.69 previously based on sum-of-parts (SOP) valuation after revising up its net cash position. We also maintain our positive view on the healthcare sector in general.

Although both Pantai and Faber have stated that they are not in discussion regarding the potential sale of the former’s concessions, we gather that Faber is indeed interested to acquire both concessions provided that the pricing is right.

Although Faber’s management neither denied nor confirmed the potential acquisition, we gather that Faber has already registered its interest to take over the concessions a few years back when speculation first emerged.

There might be some concern that the potential deal could potentially result in a highly geared balance sheet for Faber if it decides to finance the potential deal using borrowing.

However, we strongly believe that Faber has the financial muscle to undertake the deal without straining its balance sheet supported as  its current balance sheet is relatively underleveraged with a net cash position of RM125 million as at FY09.

After a successful business restructuring plan undertaken by Faber which has resulted in a simpler business model and less capital intensive business, we believe it is unlikely for Faber to repeat the same story by overgearing its balance sheet. Depending on the actual acquisition cost, Faber’s profits could potentially be boosted by 50%.

Despite the recent price appreciation, Faber is currently trading at only 7.5 times price-earnings ratio (PER) on FY10 earnings per share (EPS), which we deem cheap, on top of the potential upside in dividend payout given that the current payout is less than 30% of Patami (profit after tax and minority interests). — OSK Research, March 17

This article appeared in The Edge Financial Daily, March 18, 2010.