PP 7767/09/2010(025354)

21 September 2010

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
21 September 2010
MARKET DATELINE

Faber Group Share Price

Fair Value
:
:
RM3.16
RM3.82
Concession Agreement – Likely To Be Renewed Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (FAB; Code: 1368) Bloomberg: FAB MK

Net Core EPS Net
FYE Turnover Profit EPS Growth PER C.EPS P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009 805.3 82.7 22.8 35.3 13.9 - 3.2 net cash 23.4 1.9
2010f 928.0 95.3 26.3 15.3 12.0 27.0 2.7 net cash 22.3 2.2
2011f 1111.3 124.3 34.2 30.4 9.2 24.0 2.2 net cash 24.1 2.5
2012f 1227.3 138.5 38.2 11.4 8.3 43.0 1.8 net cash 22.1 2.7
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC #Excluding EI * Consensus Based On IBES Estimates

♦ We met with management recently. Key highlights included:

Issued Capital (m shares) 363.0
o Concession agreement – likely to be renewed. Recall Faber Market Cap (RMm) 1,147.1
submitted its application for a renewal of its government hospitals non- Daily Trading Vol (m shs) 1.3
medical support services concession to the Ministry of Health (“MOH”) 52wk Price Range (RM) 1.002-3.19
in Oct 2009. The outcome is expected to be known by Oct 2010. Faber’s Major Shareholders: (%)
14-year track record and technical expertise are evident from: 1) the UEM Group 34.3
Universal Trustee 23.4
company’s ability to expand its Integrated Facilities Management (IFM)
business locally and overseas; 2) its access to skilled, semi-skilled and
unskilled labour supply to support the five basic services under the FYE Dec FY10 FY11F FY12F
concession; and 3) the operation of laundry and waste disposal facilities EPS chg (%) - 29.9 (16.6)
required under the concession. Therefore, we maintain our view that Var to Cons (%) (6.2) 7.0 (2.1)
the concession agreement is likely to be renewed.
PE Band Chart
o Softer UAE earnings in 2H10. Management expects softer UAE
earnings in 2H10 due to seasonal factors i.e. ramadhan and summer PER = 12x
when less work can be done. This is in line with our expectation. PER = 8x
PER = 4x

o Deferment of IFRIC 15 to Jan 2012. The implementation of the new

IFRIC 15 accounting standard on real estate development has been
deferred to Jan 2012, from Jul 2010 previously. As such, Faber will
continue to recognise its earnings based on percentage of completion,
i.e. progressive billing method rather than completion method under
Relative Performance To FBM KLCI
IFRIC 15. As such, we have revised up our FY11 property earnings to
RM200m from none previously, while lowering our FY12 property
earnings to RM300m (from RM495m previously). This has no impact on Faber Group

our fair value calculation which includes property based on DCF.

♦ Risks to our view. 1) Failure to secure an extension to the concession

agreement with the Government; and 2) Delays in property launches and FBM KLCI

approvals, which could affect revenues from the property segment.

♦ Forecasts. No change to our FY10 forecast. However, as highlighted

above, our FY11-12 EPS forecasts have been revised by +29.9% and
-16.6% respectively for the deferment of IFRIC 15.

♦ Investment case. Our SOP fair value remains unchanged at RM3.82 (see
Table 2). If the concession is not renewed, our “worst-case” SOP valuation
will fall to RM2.21, i.e. 30% below the current share price but we see little
risk of this happening. On the contrary, our forecasts currently factor in a
Yap Huey Chiang
10% drop in service fees under a renewed concession, but we believe the
(603) 92802179
company will likely negotiate for higher fees to account for inflation. We
yap.huey.chiang@rhb.com.my
thus reiterate our Outperform call on the stock.

Please read important disclosures at the end of this report. Page 1 of 6

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 21 September 2010

Key Takeaways

♦ Focus back on the impending renewal of the concession. Although Faber has been successful in expanding
its Integrated Facilities Management (IFM) business overseas especially in the United Arab Emirates (UAE) and
India, the government concession for non-medical hospital support services in Malaysia’s northern region
continues to dominate the earnings profile. In 1HFY10, the concession accounted for 57% of total revenue.

♦ Expiry in Oct 2011 … Recall the 15-year concession will expire in Oct 2011. Management submitted its
application for renewal of the concession to the Ministry of Health (MOH) in Oct 2009, and expects the outcome to
be known by Oct 2010. Although the market may be expecting an early reply from the Government – which would
explain the recent upsurge in Faber’s share price – we believe otherwise, and likewise management expects the
Oct 2010 schedule to be on track.

♦ … but likely to be renewed. In any case, we believe the reply will be favourable for the following reasons:

o Management continues to put significant effort into improving its services (although this should not be too
surprising given the concession still has one more year to run). However, we note that the company has also
continued to invest in its facilities including a new biomedical waste incinerator which was built in 2009 at a
cost of RM18m. Faber undertakes most of the services in-house, except for basic cleaning services such as
toilets and corridors (but not the operating theatre and other essential medical areas). This differentiates
Faber from the other two concessionaires which have outsourced more services to sub-contractors.

o Faber’s 14-year track record and technical expertise are evident from the company’s ability to expand its
Integrated Facilities Management (IFM) business locally and overseas and this is supported by; 1) its access
to skilled, semi-skilled and unskilled labour supply to support the five basic services under the concession; 2)
its huge database of hospital equipment pricing and technical maintenance requirements; and 3) its buying
power for consumables and replacement parts is underpinned by its large market share of government
hospitals in Malaysia (comprising 79 hospitals in six states, including Perak, Penang, Perlis, Kedah, Sabah and
Sarawak).

o Service benchmarks under the existing concession have been consistently met without any unit price increase,
although higher imported costs of replacement parts for hospital equipment have been passed on to the
hospitals as agreed.

o Since Oct 2009, Faber has been actively participating in dialogues with MOH regarding issues and concerns
relating to the five services (see Chart 1) offered by the concession holders and the outcome so far have been
successful.

Chart 1. Integrated Facilities Management Services Offered By Faber

IFM

Healthcare Non-Healthcare

Facilities Bio-Medical Clinical Waste Cleansing and Linen and Facilities

Engineering Engineering Management Janitorial Services Laundry Services Management and
Maintenance Maintenance Administration

Building
Maintenance

Housekeeping
Management

Security, Safety
and Health
Management

Source: Company

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 21 September 2010

♦ Merger of Faber Medi-Serve and Pantai Medivest is still possible. Concurrently, we also believe that M&A is
possible for the concessionaires, especially for the two related to Khazanah Nasional, i.e. Faber Medi-Serve and
Pantai Medivest. Assuming Faber is the vehicle for such a merger, this would result in the company expanding its
coverage to include southern states of Peninsular Malaysia, in addition to the existing northern states plus Sabah
and Sarawak. Given Faber’s strong financial position with a net cash of RM172.8m as at Jun 2010, we believe the
company would not have too much of a problem acquiring Pantai Medivest from Khazanah’s Pantai Holdings
(which has effectively become a wholly-owned subsidiary after the Government investment arm took over
Parkway). Previously we had assumed that Pantai Medivest’s assets are smaller in size to that of Faber Medi-
Serve, we estimate its book value to be around RM90-100m.

♦ Softer UAE earnings expected in 2HFY10. In 1HFY10, Faber’s non-concession IFM business overseas grew to
RM118.9m, from 19.2m in 1HFY09, thanks to aggressive expansion in both local and overseas IFM. Recall that in
May, Faber’s IFM contract in Madinat Zayed Abu Dhabi (to maintain low-cost houses) was renewed for another
year with an annual value of RM57.8m p.a.. In Jul, Faber also secured a contract with Abu Dhabi Health Services
Company to maintain all mechanical systems and equipment and various electrical installations and fittings at the
Sheikh Khalifa Medical City (Main Campus) and affiliated building in the region of Abu Dhabi worth RM20.4m p.a..
Another existing IFM contract in Madinat Zayed Abu Dhabi (for maintenance of infrastructure facilities) is expected
to be renewed by year-end. The current one-year contract had an initial indicative value of AED152m (equivalent
to RM142m when awarded in Nov 2009, although by May 2010 the billings had already amounted to RM150m).
We note that the ringgit has since strengthened against the UAE dirham by around 9% but management is still
expecting the renewed contract to be worth more than RM100m. In any case, management is expecting softer
UAE earnings in 2HFY10 due to seasonal factors i.e. ramadhan and summer season when less work can be done.
This has already been factored into our forecasts. The company is eyeing potential new infrastructure
maintenance contracts in UAE – we will update our forecasts if Faber is successful in wining these contracts.

♦ Expect strong growth from India, but from a low base. We note that in India, the normal business practice
is that Faber has to negotiate with the management of each hospital to secure service contracts, regardless of the
hospital group that the hospital belongs to. The India expansion has thus been slower. Nevertheless, Faber has
now secured contracts with 15-20 Apollo hospitals and 3 Fortis hospitals. These contracts are mainly basic
services for now, plus some higher-margin biomedical equipment maintenance (BEM) contracts for a small
number of hospitals. According to management, Khazanah Nasional’s tussle with Fortis over Parkway has
apparently not affected Faber’s relationship with one of India’s largest hospital groups, and negotiations with
Fortis hospitals to provide IFM services are proceeding as planned.

♦ Property - deferment of IFRIC 15 to Jan 2012. The implementation of IFRIC 15 (the new accounting standard
by International Financial Reporting Interpretations Committee) on real estate development has been deferred to
Jan 2012, from Jul 2010 previously. According to MASB’s website, the deferment is to allow stakeholders to
continue deliberating its implementation as it noted that the sell-and-build business model used by developers in
Asia, where both the seller and buyer share certain elements of risk over the real estate-in-progress, differs from
real estate business models employed elsewhere. As such, Faber will continue to recognise its earnings based on
percentage of completion, i.e. progressive billing method rather than completion method under IFRIC 15. As such,
we have revised up our FY11 property earnings to RM200m from none previously, while lowering our FY12
property earnings to RM300m (from RM495m previously). This has no impact on our fair value calculation which
includes property based on DCF.

Risks

♦ Risks to our view. 1) Failure to secure an extension to the concession agreement with the Government; and 2)
Delays in property launches and approvals, which could affect revenues from the property segment.

♦ Mitigating factors. As discussed above, we believe there is little risk that the concession will not be renewed
given the company’s track record and relative importance in the supply chain of the Government healthcare
system. In our view, negotiation will be focused on the service fees rather than on the concession itself, and this
will likely take place in the twelve months prior to the expiry of the current concession, i.e. Nov 2010 to Oct 2011.

Forecasts and Assumptions

♦ Forecasts. No change to our FY10 earnings forecast. However, as highlighted above, our FY11-12 EPS forecasts
have been revised by +29.9% and -16.6% respectively for the deferment of IFRIC 15.

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 21 September 2010

Valuations and Recommendations

♦ Investment case. Our SOP fair value remains unchanged at RM3.82 (see Table 2), which implies 20% upside
from current levels. We continue to like Faber for its resilient earnings derived from the concession business
together with its ongoing expansion plans for its non-concession business locally and overseas. If the concession
is not renewed, our “worst-case” SOP valuation will fall to RM2.23, i.e. 30% below the current share price but we
see little risk of this happening. On the contrary, our forecasts currently factor in a 10% drop in service fees under
a renewed concession, but we believe the company will likely negotiate for higher fees to account for inflation. We
thus reiterate our Outperform call on the stock, with possible upside to our SOP fair value of RM3.82. Further
upside would come if Faber undertakes M&A (potentially in relation to Pantai Medivest), which we have highlighted
in our previous reports. Our forecasts and fair value estimate do not include any M&A but we believe Faber is in a
strong financial position to do so, and this would take the company to a new level of growth.

Table 2. Sum Of Parts Calculation

Valuation basis FV (RMm) Per share (RM)
Concession IFM DCF 658.9 1.82
Non-Concession IFM 14x FY10 earnings 476.5 1.31
Property DCF 76.9 0.21

Add : Net cash (End-2QFY10) 172.8 0.48

SOP 1,385.1 3.82
Shares (m) 363.0
Source: Company data, RHBRI estimates

Table 3. “Worst-Case” Sum Of Parts Calculation If The Concession Is Not Renewed

Valuation basis FV (RMm) Per share (RM)
Concession IFM Net assets 250.0 0.69
Non-Concession IFM 14x FY10 earnings 476.5 1.31
Property DCF 76.9 0.21

Add : Net cash (End-2QFY10) 172.8 0.48

SOP 803.4 2.21
Shares (m) 363.0
Source: Company data, RHBRI estimates

Table 4. Earnings Forecasts Table 5. Forecasts Assumptions

FYE Dec (RMm) FY09a FY10f FY11f FY12f FYE Dec (RMm) FY10f FY11f FY12f
Turnover 805.3 928.0 1,111.3 1,227.3 Revenue:
Turnover growth (%) 20.2 15.2 19.8 10.4 Concession 544.1 562.2 543.5
EBITDA 169.0 193.6 235.7 263.8 Non-concession 304.2 349.1 383.8
EBITDA margin (%) 21.0 20.9 21.2 21.5 Property 79.6 200.0 300.0
Dep & Amort (21.0) (23.0) (24.7) (26.4)
EBIT 148.0 170.6 211.0 237.4
EBIT margin (%) 18.4 18.4 19.0 19.3 EBIT:
Net interest expense (6.7) (6.7) (6.7) (6.7) Concession 97.9 101.2 97.8
Associates (0.3) 0.0 0.0 0.0 Non-concession 54.8 62.8 69.1
Pretax Profit 140.9 164.0 204.4 230.8 Property 17.9 47.0 70.5
Tax (34.8) (41.0) (42.9) (48.5)
Minorities (23.4) (27.7) (37.1) (43.8)
Net Profit 82.7 95.3 124.3 138.5
Core net profit 82.7 95.3 124.3 138.5
Core Growth (%) 69.7 15.3 30.4 11.4
Source: Company Data, RHBRI estimates Source: Company data, RHBRI estimates

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 21 September 2010

Chart 2: Faber Technical View Point

♦ The share price of Faber resumed its rally after a
decent consolidation in Apr 2010, from a resistance
level at RM2.60.

♦ The stock removed the RM2.60 level in Jun 2010,

before hitting a key resistance level at RM3.04.

♦ The stock was engaged in strong profit-taking leg

throughout mid-Jun to Aug, but sustained well at
above the RM2.60 level in general.

♦ Beginning from Sep 2010, the stock turned bullish

again and soared steeply towards the RM3.04 level.

♦ It broke out from the level last week and touched a

high of RM3.22, before closing at RM3.16
yesterday.

♦ Chart wise, it registered a small negative candle

after a huge bullish candle earlier, to suggest mild
profit-taking activities underway to neutralise its
overbought momentum in the near term.

♦ However, we favour the recent chart breakout from

RM3.04, and expect the upswing to remain firmly
intact.

♦ Further push on the share price will lead to a retest

of RM3.40, before scaling higher to the RM4.28
higher resistance level, in our view.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in
any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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