M&A exercise set to expand crane specialist’s earnings base
Favelle Favco Bhd is stepping out from the shadow of its parent company Muhibbah Engineering (M) Bhd.
The crane specialist plans to expand its earnings base by venturing into new growth areas through a merger and acquisition (M&A) exercise.
Two weeks ago, Favelle announced a plan to buy controlling stakes in four engineering and automation-related companies for about RM87.4mil.
Favelle is currently sitting on RM380mil cash and has been eyeing M&A partners over the past few years.
In addition, it has a gearing ratio of 0.04 as at June 30, 2017, which gives the company ample room to finance its expansion.
The acquisition plan is timely considering that crude oil prices have been stabilising. Although it is nowhere close to its heydays, the price of Brent crude oil is trading between US$50 and US$55 a barrel over the past few months.
Although the decline in oil prices for the past three years has not deterred the company’s growth, Favelle’s orderbook replenishment is slowing down.
This is because more than 60% of its business is in the offshore oil and gas (O&G) cranes. As such, diversification has been part of the company’s plan.
Presently, it has an orderbook of RM536mil, halved from its orderbook in 2014 of RM1.02bil. Earnings wise, the company saw its net profit grew marginally to RM32.3mil in the first half ended June 30, 2017, from RM31.3mil a year ago.
Favelle says it has inked a heads of agreement to acquire 70% stake each in Exact Automation Sdn Bhd, Sedia Teguh Sdn Bhd, Exact Analytical Sdn Bhd and Exact Oil & Gas Sdn Bhd.
These companies are primarily involved in the provision of engineering services, industrial automation solutions, and specialised equipment mainly for the O&G industry.
Analysts are mainly positive on the acquisitions, especially as it could boost Favelle’s depleting orderbook and become key growth driver, moving forward.
The target companies have combined audited profit after tax of RM15.3mil for the financial year ended Dec 31, 2016.
The proposed deal values the target companies at eight times their combined historical earnings, of which CIMB Research deemed it as attractive for Favelle.
“It diversifies the company’s earnings base from purely cranes to industrial automation and specialised O&G equipment segment that is not limited to the O&G sector,” it says in a report.
Meanwhile, MIDF points out that the earnings from the target companies would translate into an addition of seven to nine sen earning per share for Favelle, should the deal goes through.
“At the moment, we will maintain our earnings pending the signing of the sale and purchase agreement,” it says.
The research house says the proposed acquisitions will further strengthen Favelle’s position in the O&G industry.
“Despite the current lack in orders for offshore cranes, we believe that Favelle is still standing strong.
“With the recent deal, the company will be able to further increase its exposure in the O&G industry by having the ability to supply more services.
“In addition, Exact Oil & Gas Sdn Bhd is also a licensed company by Petronas,” MIDF says.
The proposed acquisition has also given the much needed catalysts to the stock, which saw more than 8% jump following the announcement.
Since the beginning of the year, Favelle’s shares have risen by more than 22% to RM2.76. It is currently trading at earnings multiple of 8 times, which is at a discount of its parent company’s Muhibbah at 11.45 times price-earnings (PE) ratio.
Muhibbah, which is a construction firm with orderbook of RM1.5bil, has almost 60% stake in Favelle.
MIDF says the average PE of Favelle’s Asian regional peers is 11 times.
Interestingly, Favelle has been dishing out consistent dividends to its shareholders of 15 sen a share in 2015 and 2016, respectively. Based on the last traded price of RM2.76, the company offered a decent dividend yield of 5.5%.
It is worth noting that Favelle has about 40 years experience in the crane business. With the O&G sector starting to gain traction as crude oil prices continue to stabilise, it is timely for Favelle to embark on its next phase of growth.
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