FABER Group's (RM1.90) earnings have moved to a new higher level as the company has successfully expanded and diversified its facilities management arm overseas.  

The successful track record of its local operations has given Faber a head start in bidding for overseas projects, which is now gaining momentum. This was evident in its recently released FY Dec 2009 final results.  

Revenue from Faber's overseas facilities management operations increased nearly six-fold from RM25.2 million in 2008 to RM142.3 million in 2009. This will likely expand further in 2010, since the bulk of the growth in 2009 came only in the last quarter. We forecast overseas operations to contribute RM220 million in revenue annually in 2010-2011.

Strong 2009 results
The strong overseas contributions resulted in strong earnings for Faber in 2009, which far exceeded market expectations.

Despite lower property contributions, underlying net profit for 2009, excluding exceptional items, rose 32% to RM82.7 million, or 49% above our earlier forecast of RM55.5 million. Underlying pre-tax profit increased 26.6% to RM141.2 million, while revenue rose 21.8% to RM805.3 million.

Overall profit levels in 2009 were, however, lower than 2008, as there was a one-off gain of RM93.2 million from the sale of the Sheraton Hanoi hotel in 2008.   

The fourth quarter was a particularly strong one. Revenue in 4Q09 doubled to RM303.9 million, pre-tax profit surged 128% to RM65.8 million while net profit surged 138% to RM42.6 million. This was a significant improvement from the previous quarters' net profit of RM19 million in 3Q09, RM26.4 million in 2Q09 and RM13.8 million in 1Q09.

The major catalyst was the much stronger-than-expected profits and margins at the integrated facilities management arm, as its overseas ventures kicked off. Profits at the integrated facilities management arm surged 89% to RM127.9 million from RM67.7 million. Pre-tax profit margins here increased from 13.3% to 18.7%.

This division was helped notably by contributions from new ventures overseas, particularly in the United Arab Emirates (UAE), which commenced in 1Q09 and contributed mostly in 4Q09. There were also higher variance orders, bed occupancy rate and new facilities at local hospitals under its Faber Medi-Serve (FMS) concession arrangement.

The property arm also saw a smaller-than-expected decline, as earnings recognition from progress billings at Laman Rimbunan picked up in subsequent quarters, after a small loss in 1Q09. Property profits fell 34% to RM28.1 million on the back of revenue of RM122.5 million.  

Faber's balance sheet remains very solid, with net cash of RM125.1 million as at December 2009 — or a sizeable 34.5 sen per share. A final dividend of six sen has been proposed for 2009, up from four sen in 2008. This translates into a decent gross yield of 3.2% at the current share price.

We are assuming a similar level of dividends in 2010-2011, although Faber can afford to increase its payout given its rising cash balance.

Positive earnings outlook
We expect higher facilities management earnings in 2010, but are conservatively forecasting lower property profits.

Unbilled sales have fallen to RM30 million and the company would need to replenish it soon with new launches. Some RM495 million in new launches are planned this year, in Taman Desa and Laman Rimbunan, but the timing and take-up rates will depend on market conditions.

We expect Faber's net profit to rise 10.3% to RM91.2 million in 2010 and 7.1% to RM97.7 million in 2011, with earnings per share (EPS) of 25.1 sen and 26.9 sen, respectively.

We maintain our long positive view on the company and the stock. Although Faber's shares have rallied strongly, they remain undervalued at 7.6 times 2010 and 7.1 times 2011 earnings, with a pool of defensive earnings, the likelihood of upside surprises and decent dividend yields.

Wildcard in concession renewal?
The wildcard for Faber is in its 2012 earnings, as its 15-year government concession, under FMS will end in October 2011.

Although there is always a risk of non-renewal, we think that is highly unlikely. Faber has done a good job — despite the absence of tariff hikes, met its KPIs and invested heavily in infrastructure for the services. We also take heart in the fact that Faber is a government-linked company, 34% owned by United Engineers, a subsidiary of Khazanah Nasional Bhd.

The government, through Khazanah, has also built up a portfolio of healthcare assets here and overseas. It owns another concessionaire in the government healthcare facilities management scheme, Pantai Medivest, leaving only the third and other player Radicare in private hands.

We understand Faber has sent in an application for renewal in October 2009. This is in line with the terms of the concession, which requires a one-year submission period, after which negotiations and assessments are made and the results known by October 2010.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.