Faber_20100329_DBS

“In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.”

www.dbsvickers.com Refer to important disclosures at the end of this report ed: LMY / sa: WMT

BUY RM2.31 KLCI : 1,315.14 (Initiating Coverage) Price Target : 12-Month RM 3.55 Reason for Report : Initiation coverage Potential Catalyst: More contracts secured from overseas, upward revision of concession rates

Analyst Chong Tjen-san, CFA +603 2711 2222 [email protected] Juliana Ramli +603 2711 2222 [email protected] “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”

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Relative Index

Faber Group (LHS) Relative KLCI INDEX (RHS) Forecasts and Valuation FY Dec (RM m) 2009A 2010F 2011F 2012F

Turnover 805 890 952 1,002 EBITDA 163 173 189 202 Pre-tax Profit 141 148 162 174 Net Profit 83 86 95 102 Net Pft (Pre Ex.) 75 86 95 102 EPS (sen) 22.8 23.7 26.1 28.0 EPS Pre Ex. (sen) 20.8 23.7 26.1 28.0 EPS Gth Pre Ex (%) 24 14 10 7 Diluted EPS (sen) 22.8 23.7 26.1 28.0 Net DPS (sen) 4.5 4.7 5.2 5.5 BV Per Share (sen) 107.2 126.5 147.9 170.7 PE (X) 10.1 9.7 8.8 8.3 PE Pre Ex. (X) 11.1 9.7 8.8 8.3 P/Cash Flow (X) 8.1 7.6 6.9 6.4 EV/EBITDA (X) 4.8 4.3 3.6 3.0 Net Div Yield (%) 1.9 2.0 2.2 2.4 P/Book Value (X) 2.2 1.8 1.6 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.4 20.3 19.0 17.6 Consensus EPS (sen): 27.0 27.7 N/A ICB Industry : Health Care ICB Sector: Health Care Equipment & Servic Principal Business: An integrated facilities management service provider and a property developer

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 363 Mkt. Cap (RMm/US$m) 839 / 254 Major Shareholders Khazanah Nasional (%) 34.3 Universal Trustee (Malay) (%) 23.4 Free Float (%) 42.3 Avg. Daily Vol.(‘000) 1,170

DBS Group Research . Equity 29 Mar 2010

Malaysia Company Focus

Faber Group Bloomberg: FAB MK EQUITY | Reuters: N/A

Underappreciated GLC

• Underappreciated, well-managed GLC trading at CY11F PE of 7.5x (ex-cash) with a cash-rich balance sheet. Also an excellent play on our anchor market theme – relisting of GLCs

• Proxy to resilient healthcare industry where local facilities management (FM) concession is cash cow

• Overseas expansion and potential JVs with other GLC developers will provide incremental growth

• Initiate with a Buy and RM3.55 SOP-derived TP.

Faber is an underappreciated, well-managed GLC which is 34%-owned by Khazanah Nasional. It’s core business is providing FM services to the local healthcare industry. It trades at CY11F PE of 7.5x (ex-cash) on the back of 10.6% 3-year EPS CAGR in spite of a regulated concession business, 1.3x FY11F BV, with ROEs of c.19-20% and has a cash-rich balance sheet (net cash 34.5 sen per share). It is also a proxy to the resilient healthcare industry where the renewal of its concession in Oct 2011 will give another 15 years solid earnings visibility, in our view. Kicker will be a potential tariff increase which will be margin and ROE accretive, where a 10% increase in the total concession revenue will raise our DCF valuation by 5% and SOP by 15 sen.

Overseas expansion to drive growth. Faber’s strong franchise locally (consistently ranked no. 1) has enabled it to export its expertise overseas to two key markets – Middle East and India. It has c.RM216m p.a. (25% of FY10F revenue) and c.RM20m p.a. contracts in the Middle East and India respectively. Size of the FM industry in UAE is estimated to be worth US$704bn while pre-tax margins are higher at c.24%. We estimate every RM50m increase in contract value p.a. from UAE will lift FY10F-11F EPS by 7-8%.

Initiate with a Buy call and RM3.55 SOP-derived TP, implying 13.6x CY11F EPS and 2.4x CY11F BV. We believe the stock is grossly undervalued considering its good earnings visibility from the long-term cash-generating FM concession, potential growth coming from the overseas expansion particularly UAE, and strong balance sheet. Faber is an excellent play on our anchor market theme – relisting of GLCs. In our view, Khazanah will use Faber as the listed vehicle to monetise the embedded value of Pantai's concession whilst also giving the listed entity immediate enlargement in market capitalisation, scale and market penetration.

Company Focus

Faber Group

Investment Thesis

Initiate with a Buy call for Faber and RM3.55 SOP-derived TP, implying 13.6x CY11F EPS and 2.4x CY11F BV. We value the FM business based on DCF-based methodology (WACC: 11.6%; terminal growth: 1.0%). Meanwhile, the property segment is valued based on 10x CY11F EPS, consistent with the average small cap property peers’ valuation. We see three key catalysts unfolding for Faber which would narrow the deep discount to our SOP value of RM3.55:

1) Underappreciated, well-managed GLC. Given its sterling 4Q09 results, the market has started to realize Faber’s potential. But we think it is still early days. It still trades at compelling CY11F PE of 7.5x (ex-cash) on the back of 10.6% 3-year EPS CAGR in spite of a regulated concession business, 1.3x FY11F BV, with decent ROEs of c.19-20% and has a cash-rich balance sheet (net cash 34.5 sen per share). It is also a proxy to the resilient healthcare industry where the renewal of its concession in Oct 2011 giving it another 15 years solid earnings visibility is a given. The kicker will be a potential tariff increase which will be margin and ROE accretive, in which a 10% increase in the total concession revenue will raise our DCF valuation by 5% and SOP by 15 sen. The concession alone contributed c.64% to group revenue and c.53% to PBT in FY09.

2) Growth from overseas expansion. Faber’s strong franchise locally where it is consistently ranked no. 1 by the Ministry of Health has enabled it to export its expertise overseas to two key markets – the Middle East and India:

• Middle East: It has c.RM216m p.a. worth of contract in the Middle East (25% of FY10F revenue). Given the increasing number of completed buildings following the construction boom in the Middle East over the past few years, we understand that the FM industry is rapidly growing there. According to Middle East Strategy Advisors, the FM industry in UAE alone is estimated to be worth US$704bn over 25 years. Apart from ample room for growth in UAE, we understand that margins for the projects are also better than the local ones i.e. c.24% vs 15% PBT margins respectively. Based on our sensitivity analysis, every RM50m increase in contract value p.a. from UAE, could lift FY10F-11F EPS by 7-8%.

• India: Faber also has a presence in India but current contract value is still relatively small, i.e. c.RM20m p.a. But the size of the FM market in India is also not inferior to UAE. According to consulting firm, Netscribes (India) Pvt. Ltd.,

India’s FM market is estimated to be worth US$3.3bn (RM10.9bn) p.a. and is projected to grow by 25-30% p.a. over the next 3-4 years. The FM sector is set to ride on the growing India’s real estate sector as more international companies increase their presence in the country. However, competition may be more intense in India compared to UAE as barriers to entry are low and there are presently about 1,000 FM players.

3) Committed to expand property business. Faber remains committed to expanding its property business (15% of FY10F revenue and 21% of FY10F pre-tax profit) with land bank of just 43 acres (of which 33 acres is in Klang Valley while the remaining is in Sabah), where its strong cash in its kitty will enable it to acquire more land bank. While Faber may not be a front runner vis-a-vis other GLCs for the much sought after government land, we do not discount potential JVs with other Khazanah-owned developers. At the moment, we expect that the property business to perform better this year with total GDV of RM495m for the projects to be launched.

An excellent play on one of our anchor market theme – relisting of GLCs. The wildcard for Faber is potential M&As where the most obvious candidate is another FM concessionaire, Pantai Medivest Sdn Bhd (Pantai Holding’s subsidiary), given the common shareholding in Khazanah. While we acknowledge management’s view that more players are healthy for competition, the appeared willingness of Pantai’s shareholders to exit the business (believed to be in its effort to focus on growing its hospital business) may prove to be an ideal fit for Faber. While the cost of acquisition is a key issue considering that the concession is expiring in less than 2 years, at the operational level, the concession will also likely be renewed. In our view, Khazanah will use Faber as the listed vehicle to monetise the embedded value of Pantai's concession whilst also giving the listed entity immediate enlargement in market capitalisation, scale and market penetration to other states. Assuming Pantai Medivest’s assets and liabilities are similar to Faber’s concession unit, Faber Medi-Serve Sdn Bhd, we estimate its BV to be RM95-100m (vs Faber’s est. RM275m). This is based on its market share of 18%. Similarly, we estimate Pantai Medivest’s revenue per year to be RM170-190m (vs Faber’s RM502m p.a.) given its smaller market share.

Company Focus

Faber Group

SWOT Analysis

Strengths Weakness • Good long-term earnings visibility. The renewal of the government’s hospital support facilities management service concession will provide another 15 years visibility to Faber’s earnings. In FY09, the concession contributed c.64% to group revenue and c.53% to PBT. • Largest market share in FM concession. We believe that the renewal of the concession is likely given Faber’s government parentage, large market share of 50%, and ability to meet all service agreements. The remaining 50% share is held by another two concessionaires i.e. Pantai Medivest Sdn Bhd and Radicare (M) Sdn Bhd. • Strong balance sheet. Following the corporate restructuring exercise in 2000-04, the Group is now on a stronger footing with 34.5sen of net cash per share.

• Limited land bank available for property development. We understand that Faber has 43 acres of land bank left. 33 acres of this is in Klang Valley while the remaining is in Sabah. • Still highly dependent on government’s concession. However, Faber’s initiative to diversify into other FM business in both healthcare and non-healthcare sectors, locally and overseas, would reduce dependency on the concession. We expect share of pre-tax contribution from the overseas FM to rise going forward to 34-36% in FY10F-11F (from 25% in FY09) as more contracts are recognized.

Opportunities Threats • Ample room for growth in UAE. The FM industry is growing rapidly in the Middle East as the number of completed buildings increases following the construction boom over past few years. The Middle East Strategy Advisors estimates the FM industry in UAE alone to be worth US$704bn over 25 years. Hence, opportunities to secure more contracts in UAE are ample for Faber. • Moving up value chain. Faber also look to expand vertically by moving up the value chain through management of information systems and ownership. However, this is unlikely to be significant in the near term. • Higher concession rates. The key thing to look out for is potential higher tariff rates upon renewal of the FM concession as the rates have never been revised since the concession was awarded in 1996 while costs have been rising.

• Failure to secure renewal of concession could severely affect Faber given the significant contribution to earnings. However, we believe that this is highly unlikely. • Delays in property launches could affect Faber’s earnings. But in line with our house expectation of brighter property market outlook, we do not expect Faber to delay any of its scheduled property launches. • Slow progress billings at UAE which could be due to lack of resources, particularly labour force. However, we understand that Faber is increasingly building up its expertise by acquiring and training more personnel. This should help mitigate the labour shortage.

Source: DBS Vickers

Company Focus

Faber Group

Company Background A key player in Facilities Management. Faber Group was incorporated in May 1963, when Merlin Hotels Malaysia was first incorporated. Merlin Hotels was initially focused on the hospitality industry. However, in 1972, Merlin Hotels merged with Faber Union Sdn Bhd to form Faber Merlin Malaysia Berhad. The Group then changed its name to Faber Group Berhad in Nov 1990 with core businesses in Hospitality and Property. Faber then expanded its portfolio after being awarded a 15-year concession in Oct 1996 for hospital support services to government hospitals in the northern states of Peninsular Malaysia and in East Malaysia. The Group is listed on the Main Board of Bursa Malaysia and currently 34.3 % owned by the UEM Group (UEM is wholly-owned by Khazanah Nasional Berhad). Restructuring is over, focus is now on expansion. Faber had undergone a series of restructuring exercises since 2000 after it was hit by the Asian Financial Crisis in 1997-98. Following the successful implementation of the restructuring exercise, Faber was re-listed on the Main Board of Bursa Malaysia in Nov 2004. The Group exited the hotel sector after it disposed its final hotel asset, Sheraton Hanoi, to Berjaya Land Berhad in 2008. As the restructuring had been completed, Faber is now ready to continue to grow as an FM player. The Group began expanding in UAE and India in 2006.

FY09 revenue breakdown

FM - UAE16%

FM - local3%

Properties16%

FM - India2%

FM - concession

63%

Source: Company, DBS Vickers FY09 PBT breakdown

Property18%

FM82%

Source: Company, DBS Vickers

Corporate Milestones Year Major events

1963 Incorporated as Merlin Hotels Malaysia Berhad. Hotel owner and manager of the “Merlin” brand.

1964 Listed under the Hotel Sector on the Main Board of Kuala Lumpur Stock Exchange (KLSE).

1972 Merged with Faber Union Sdn Bhd, a property developer company to form Faber Merlin Malaysia Berhad.

1990 Changed name to Faber Group Berhad.

1993 Embarked on expansion and rebranding of the hotel division with the tie-up with Starwood International to re-brand certain hotels to the “Sheraton” brand.

1996 Awarded a 15-year concession for Hospital Support Services to 79 Government Hospitals. Embarked on service provision for the Integrated Facilities Management (IFM) Sector.

2000 First Debt Restructuring under the purview of the Corporate Debt Restructuring Committee.

2003 Faber Fell under PN4 status due to negative shareholders’ funds.

2004 • 30 September: Completed Second Restructuring Scheme and formation of Special Purpose Vehicle

• 5 November: Bursa Securities Uplifted PN4 Status

• 8 November: Faber relisted under the Trading/Services Sectors on the Main Board of Bursa Malaysia

2008 Disposal of Sheraton Hanoi, the final hotel asset and exit from the Hotel sector.


Company Focus

Faber Group

Faber Group corporate structure

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Source: Company, DBS Vickers Strong management team. Although part of the management team is fairly new to the Group, we believe that Faber is headed by a strong team of personnel judging from

its past achievements especially in migrating its strong franchise overseas. Faber has garnered some RM236m p.a. worth of overseas contracts within a span of 3 years.

Company Focus

Faber Group

Key Management Team Name Designation Background

Adnan bin Mohamad

Managing Director Mr Adnan was appointed as Director and Managing Director of Faber Group in Apr 2007. He is also a Member of the Investment Committee of the Group. Mr Adnan held various positions within the UEM Group between 2001 and 2005 including Managing Director of TIMEdotNet Berhad and Park May Berhad. He was also the COO of UEM Builders Berhad prior to joining Faber as a Managing Director. Prior to this, Mr Adnan was in the banking industry. Mr Adnan holds a Bachelor of Business Administration (Finance) from the University of Missouri, Kansas City, United States of America and a Diploma in Banking Studies from MARA Institute of Technology.

Syed A Hamid Bin Syed A Rahman

CEO of Faber Medi-Serve Sdn Bhd (FMS)

FMS focuses on healthcare FM (including the government’s concession). It is a wholly-owned subsidiary of Faber Group. Mr. Syed A Hamid was appointed as CEO of FMS in Jul 2007. Prior to that, he joined the UEM Group in 1989 and was transferred to Time Automation & Management Services Sdn Bhd as a CEO and subsequently to Projek Penyelenggaraan Lebuhraya Berhad (PROPEL) as a Managing Director between 1999 and 2007. Mr Syed A Hamid holds a Bachelor in Engineering (Civil) Degree from Universiti Teknologi Mara, Malaysia.

Khalid Bin Abd Majid

Head of Company, Faber Development Holdings Sdn Bhd (FDH)

FDH is the property arm of Faber and is wholly-owned by the Group. Mr Khalid joined FDH in May 1991 and was appointed as a Head of the Company in Dec 2008. He holds a Bachelor’s Degree in Civil Engineering from the Footscray Institute of Technology (now known as the Victoria University of Technology, Victoria, Australia).

Source: Company, DBS Vickers Renewal of concession will support earnings The concession revenue had been rising every year over the past few years. Apart from increased number of government’s hospitals (from 73 in 2004 to current 79 hospitals), the growth was also driven by higher bed occupancy rate and additional new facilities at the hospitals. For instance, Faber’s concession revenue depends on the demand for clean linen and collection of clinical waste (among others) which we understand are charged on weight basis. Another example is cleaning of building and facilities which are charged based on per sq ft area. We expect that the concession revenue will continue to grow despite fixed number of hospitals as demand for healthcare rises and

number of new facilities increases. Presently, under the concession, Faber services 79 government hospitals and healthcare institutions in Perlis, Kedah, Penang, Perak, Sabah and Sarawak. The services include bio-medical engineering maintenance, facility engineering maintenance, linen and laundry service, cleansing and janitorial service, and clinical waste management. The concession is the key contributor to earnings, accounting for c.64% to group revenue and c.53% to PBT in FY09. Labor-intensive business. Being in the FM services sector, the business is labor-intensive. Historically, the labor costs (salaries and benefits) account for 35-45% of the Group’s total cost of sales.

Faber’s concession coverage

Source: Company

Company Focus

Faber Group

Hospital support services Services Job scope

Bio-medical engineering maintenance (e.g. for dialysis machines, infusion pumps etc.)

• Planned preventive maintenance • Corrective maintenance • Schedule corrective maintenance • Breakdown maintenance • User training • Statutory requirement • Safety performance test

Facility engineering maintenance

• Planned preventive maintenance • Routine inspection • Corrective maintenance • Schedule corrective maintenance • Breakdown maintenance • User training • Statutory requirement • Ground maintenance and pest control

Linen and laundry service

• Supply and delivery of clean linen • Supply holder and linen bag • Collection and processing of soiled linen • Linen repairs • Transportation • Laundry plants and equipment • User training

Cleansing and janitorial services

• Cleaning of building and facilities • Waste collection and storage • Provision of supplies/ consumables • Spillage management

Source: Company, DBS Vickers FM concession to expire in Oct 2011. The current 15-year concession (awarded in Oct 1996 for hospital support services to government hospitals) is due to expire in Oct 2011. We understand that Faber had submitted an application for extension and result is expected by Oct 2010. Renewal of the concession is a given. We believe that the renewal of the concession for the government hospitals is not an issue considering Faber is a government-linked company (GLC), and the Group is the biggest concessionaire with 50% market share (in terms of number of beds serviced). We understand that Faber is also ranked no. 1 by the Ministry of Health for overall service performance compared to the other two concessionaires, Pantai Medivest Sdn Bhd and Radicare (M) Sdn Bhd. Note that our forecasts assumed that the concession is renewed with all terms unchanged.

Faber’s concession peer comparison Company Background

Faber Group • Major Shareholder: Khazanah Nasional (via UEM Group)

• Areas covered under concession: Northern Peninsular Malaysia and East Malaysia

• Market share: 50.1%

Pantai Medivest • Major Shareholder: Khazanah Nasional (via Pantai Holdings Bhd)

• Areas covered under concession: Southern Peninsular Malaysia


Radicare • Major Shareholder: a group of individuals

• Areas covered under concession: Central and East Coast of Peninsular Malaysia


Source: Company, DBS Vickers Potential higher concession rates. The key thing to look out for is potential higher tariff rates upon renewal of the FM concession as the rates have never been revised since the concession was awarded in 1996 while costs have been rising. Based on our sensitivity analysis, a 10% increase in the total concession revenue could raise FY10F-12F earnings by 5%. Diversifying into non-healthcare sector. Faber is also increasingly building facilities management (FM) expertise in the non-healthcare sectors, in an effort to become less dependent on the healthcare sector particularly the concession. The Group continues to diversify by gaining more FM contracts in other sectors such as commercial buildings, airports and ports. However, although this could be another growth area, we understand that contribution is still relatively small i.e. c.RM25m p.a. We do not expect the segment to grow significantly over the next 2-3 years as Faber needs to build its base expertise first to suit different industries before securing larger contracts. Overseas expansion to drive growth Ample room for growth in the Middle East. According to Louisa Thobald, Group Exhibitions Director of Streamline Marketing Group (organisers of FM Expo and the Property and Facilities Management Conference), based on recent studies, the outsourced FM sector in the Arabian Gulf countries is projected to reach US$10bn by 2012. The increasing number of completed buildings following the construction boom over the past few years is leading to rapid growth in the Middle East FM industry. In fact, the FM sector is expected to be resilient during the current slowdown in construction activities and almost recession proof, as the

Company Focus

Faber Group

existing buildings still need to be managed, be it full or empty. According to Middle East Strategy Advisors, FM industry in UAE alone is estimated to be worth US$704bn over 25 years. Currently, it is estimated that there at least 75 FM companies operating in UAE. Faber likely to garner more contracts from UAE. Hence, we view Faber’s expansion into UAE positively given the ample opportunities available. Note that, the Group expanded in

UAE (via 49% owned joint venture with a local partner) since 2006, in both healthcare and non-healthcare sectors. We expect Faber to garner more contracts going forward that will expand current total contract value of RM216m p.a. Although competition may be intense for Faber, we believe that Faber has the capability to secure more FM contracts given the huge size of the market as well as its existing expertise in facilities management.

Breakdown of FM contracts in UAE

Client Value Tenure Contract details RM140m p.a. (AED154m p.a.)

1+1+1+ 1 years

Improvement, development, upgrading and maintenance of infrastructure facilities and projects at Madinat Zayed – Zone-1, in WRM, Emirate of Abu Dhabi.

Department of Municipal Affairs, Western Region Municipality (WRM), Emirate of Abu Dhabi

RM60m p.a. (AED66m p.a.)

1+1+1+ 1 years

1) Provisions of Civil, Mechanical and Electrical Maintenance Services for Low Cost Houses at Madinat Zayed – AED33m p.a.

2) Provisions of Civil, Mechanical and Electrical Maintenance Services for Low Cost Houses at Liwa in WRM, Emirate of Abu Dhabi – AED33m p.a.

Local municipality RM16m p.a. (AED17m p.a.)

Mixed (min. 1 year)

Provision of hospital support services for 12 hospitals/ clinics in UAE

Source: Bursa Malaysia, Company, DBS Vickers

UAE operations

Source: Company Better margins than local FMs. We understand that margins for UAE projects are generally better than the local jobs partly due to lower labour costs and better pricing power. For instance, in FY09 alone, the UAE contracts fetched 24% pre-tax margin, much higher than the 15% recorded for the local

FM business. We have assumed the same margins in our forecasts for FY10F-12F. Revenue from UAE to grow by 60% in FY10F and 17% in FY11F assuming 91% and 86% of the total contracts secured are recognized in FY10F and FY11F respectively. This is higher

Company Focus

Faber Group

than the estimated 57% recognized in FY09. We have also assumed additional new c.RM50m p.a. contract in FY11 and expect a portion of this to be recognized during the year. We believe that our forecast for FY10 is conservative considering that most of the existing contracts were secured in FY09 and FY10-11 should reflect full year impact from these contracts. Although this could provide more upside to our forecasts, we note that there are risks of slower progress billings which could be due to lack of resources or failure to renew contracts as the contracts are renewable every year. Assuming 24% PBT margin, share contribution from these contracts are projected to expand to 32% and 34% of FY10F and FY11F pre-tax profits (from 23% in FY09) respectively. UAE revenue and PBT forecasts

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India is another key growth area but still not significant. Faber also has a presence in India but current contract value is still small, i.e. c.RM20m p.a. which comprise of FM services for commercial buildings, hospitals, and an airport in New Delhi, Hyderabad, and Chennai. The aim in India is to penetrate the higher margin BEM (biomedical engineering maintenance) and FEM (facilities engineering maintenance) industries. Presently, we understand that Faber is bidding for a RM10m p.a. contract to service 7 Fortis Hospitals. According to consulting firm, Netscribes (India) Pvt. Ltd., India’s FM market is estimated to be worth US$3.3bn (RM10.9bn) p.a. and is projected to grow by 25-30% p.a. over the next 3-4 years. The FM sector is set to ride the growing India’s real estate sector as more international companies increase their presence in the country. However, competition may be more intense in India compared to UAE as barriers to entry are low and there are presently about 1,000 FM players. Potential land acquisitions for property development Limited land bank available for development. The Group seeks to purchase more land bank for property development given its depleting land bank. Presently, Faber has 43 acres of

undeveloped land, of which 33 acres is in Klang Valley while the remaining is in Sabah. Its RM304.6m gross cash is targeted for future land bank acquisitions. We also believe that there could be potential JVs with other GLCs for property development projects given Faber's government parentage and successful reputation particularly in Taman Desa, Kuala Lumpur. Expect property business to perform better. Although property margins may not recover fully from last year (23% PBT margin in FY09, -5.0 ppts y-o-y) as more sales in FY09 may be recognized this year, we expect Faber to recognize higher sales in FY10 given the improved property market outlook. Current total GDV, for projects to be launched in 2010, is RM495m. We understand that Faber is committed to the property business but is targeting more niche projects. List of property launches in 2010

Project Type of development

GDV Target launch date

Target completion

date Phase 1A (DBKL) – Taman Desa, Kuala Lumpur

Semi-Detached houses and bungalows

RM136m 1Q10 1Q12

Phase 1A (Fleet) – Taman Desa, Kuala Lumpur

Linked villas and bungalows

RM102m 3Q10 3Q13

Laman Rimbunan (Phase 4), Kepong

Semi-D and bungalows

RM257m 2Q10 2Q12

Total GDV RM495m

Source: Company, DBS Vickers Key Risks Failure to renew concession could severely impact earnings. However, we believe that this is highly unlikely, given Faber’s government parentage, and the Group’s largest market share of 50%. Faber is also ranked the highest by the Ministry of Health for overall service performance compared to the other two concessionaires. Changes in concession rates. We believe there is more upside risk rather than downside risks in relation to changes in the concession rates. The key thing to look out for is potential higher rates as rates have never been revised while costs have been rising. Slower progress billings in UAE which could be due to lack of resources, particularly labour. However, we understand that Faber is increasingly building up its expertise by acquiring and training more personnel. This should help mitigate the labour shortage.

Company Focus

Faber Group

Failure to renew contracts in UAE (as the contracts are renewable every year) could also dampen Faber’s earnings. However, given Faber’s strong background as an FM service provider, we believe that the Group should not have any issue renewing its existing contracts.

Delays in property launches could drag down the contribution from the property segment. But in line with our house expectation of brighter property market outlook, we do not expect Faber to delay any of its scheduled property launches.

Company Focus

Faber Group

Segmental Analysis Higher margin forecast for overseas FM. We understand that in FY09, UAE contracts fetched 24% pre-tax margin, much higher than 15% recorded for the local FM business. We have assumed the same margins in our forecasts for FY10F-12F as these contracts are largely fixed. With higher margins and expected larger amount of contract value recognized, we project the FM overseas share of pre-tax profit contribution to enlarge to 34% and 36% in FY10F and FY11F (from 21% in FY09). Revenue from this segment is expected to grow by 52% and 15% in FY10F and FY11F. Note that we have assumed additional new c.RM50m p.a. contract in FY11 and expect a portion of this to be recognized during the year. Based on our sensitivity analysis, every RM50m contract value p.a., could lift FY10F-11F earnings by 7-8% (assuming 24% pre-tax margin).

Assumed successful renewal of FM concession as we believe that the renewal is highly likely. We project flat revenue growth and 15% pre-tax margin for the business in FY10F-11F assuming that the concession terms are unchanged. The segment is still a major contributor to Faber’s bottom line with 53% and 49% share of pre-tax profit in FY10F and FY11F respectively. Expect property business to perform better in FY10 although margins may be flattish as FY09 property sales may spill over to FY10. Hence, FY10 may not see a full recovery of property margins (23% PBT margin in FY09, -5.0 ppts y-o-y). However, we expect Faber to recognize higher sales volume in FY10 given improved property market outlook.

Segmental Analysis FY Dec 2007A 2008A 2009A 2010F 2011F 2012F

Revenues (RM m) Facilities Mgmt 458 508 667 755 804 839 Properties 206 153 122 135 148 163 Others 5 7 16 0 0 0 Total 670 668 805 890 952 1,002 Pre-tax profit (RM m) Facilities Mgmt 54 68 114 131 141 148 Properties 58 43 28 31 34 37 Others 26 94 (2) (14) (13) (12) Total 139 205 141 148 162 174 Pre-tax profit Margins (%) Facilities Mgmt 11.9 13.3 17.2 17.3 17.6 17.7 Properties 28.1 27.9 22.9 23.0 23.0 23.0 Others N/A N/A (10.0) N/A N/A N/A Total 20.7 30.6 17.5 16.6 17.0 17.4 Source: Company, DBS Vickers Key Assumptions FY Dec (RM m) 2009A 2010F 2011F 2012F

FM-concession revenue growth (%) 0.0 3.0 3.0 3.0 % of UAE contracts recognized (%) 57.0 91.1 86.5 93.4 Property operating margin (%) 22.9 23.0 23.0 23.0 Source: Company, DBS Vickers

Company Focus

Faber Group

Quarterly / Interim Performance Strong 4Q09. 4Q09 net profit was 2.2x that of 3Q09 to RM42.0m driven by 54% q-o-q jump in revenue. 74% of the revenue increase was attributable to higher progress billings in UAE. This resulted in 139% q-o-q jump in FM pre-tax profit

(to RM58.1m), which helped offset the 33% decline in contribution from the property segment (of RM8.8m). As the overseas projects fetched better margins, Faber’s pre-tax margin expanded by 4.6 ppts q-o-q to 21.8% during the quarter.

Quarterly / Interim Income Statement (RM m)

FY Dec 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 4Q2009

Turnover 169 186 163 150 141 170 198 304 Cost of Goods Sold (116) (128) (115) (110) (101) (119) (138) (208)

Gross Profit 53 58 48 40 40 52 60 96 Other Oper. (Exp)/Inc (24) (24) (23) (9) (25) (24) (24) (29)

Operating Profit 29 34 25 31 16 28 36 68 Other Non Oper. (Exp)/Inc 0 0 0 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 0 0 0 Net Interest (Exp)/Inc (2) (2) (2) (2) (2) (2) (2) (2) Exceptional Gain/(Loss) 96 0 (2) 0 0 0 0 1

Pre-tax Profit 123 32 21 28 14 26 34 66 Tax (8) (9) (6) (6) (5) (8) (9) (13) Minority Interest (6) (7) (2) (4) (2) (4) (6) (10)

Net Profit 109 16 13 18 7 14 19 43 Net profit bef Except. 12 16 15 18 7 14 19 42 EBITDA 34 40 31 36 21 33 41 73 Sales Gth (%) (1.1) 10.6 (12.5) (7.9) (6.2) 21.0 16.0 53.7 EBITDA Gth (%) 20.7 18.0 (21.0) 16.1 (43.1) 58.6 25.0 78.1 Operating Profit Gth (%) 35.4 18.0 (26.9) 23.2 (48.9) 79.4 27.6 89.1 Net Profit Gth (%) 57.9 31.3 (8.4) 20.8 (59.3) 90.6 37.2 124.1 Gross Margins (%) 31.2 31.1 29.2 26.5 28.6 30.2 30.3 31.7 Operating Margins (%) 17.1 18.2 15.2 20.4 11.1 16.5 18.1 22.3 Net Profit Margins (%) 64.5 8.7 7.9 11.9 5.2 8.1 9.6 14.0 Source: Company, DBS Vickers

Company Focus

Faber Group

Financials – Income Statement

Overseas business to drive growth. We project earnings to grow by 14% y-o-y each year to RM86.2m in FY10F and 10% y-o-y to RM94.8m in FY11F, driven by overseas business particularly in UAE. We expect FM overseas (including India) share of pre-tax contribution to expand to 34-36% in FY10F-11F (from 25% in FY09) as more contracts are recognized

going forward. Nonetheless, FM concession will still remain the key contributor to earnings. Faber may well exceed its FY10 KPI. At our FY10 revenue growth of 13% (ex-EI) (within the 12-15% target as per FY10 KPI), Faber could still exceed its ROE target of 15-18%. Our forecast implies 21% ROE (ex-EI), likely due to high margin assumptions.

FY Dec (RM m) 2007A 2008A 2009A 2010F 2011F 2012F

Turnover 670 668 805 890 952 1,002 Cost of Goods Sold (472) (470) (561) (625) (661) (689) Gross Profit 198 198 245 265 291 313 Other Opg (Exp)/Inc (59) (117) (102) (117) (129) (141) Operating Profit 139 107 142 149 162 172 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 0 Net Interest (Exp)/Inc (3) 4 (1) (1) 0 2 Exceptional Gain/(Loss) 3 95 0 0 0 0 Pre-tax Profit 139 205 141 148 162 174 Tax (25) (30) (35) (37) (41) (43) Minority Interest (25) (19) (23) (24) (27) (29) Preference Dividend 0 0 0 0 0 0 Net Profit 88 156 83 86 95 102 Net profit before Except. 85 61 75 86 95 102 EBITDA 175 130 163 173 189 202.3 Sales Gth (%) 13.3 (0.2) 20.5 10.5 7.0 5.2 EBITDA Gth (%) 3.8 (25.7) 25.8 5.6 9.5 7.0 Operating Profit Gth (%) 3.3 (23.3) 33.7 4.4 9.0 6.3 Net Profit Gth (%) 24.4 76.7 (46.9) 4.3 9.9 7.2 Effective Tax Rate (%) 18.3 14.6 24.7 25.0 25.0 25.0 Source: Company, DBS Vickers

Sales Trend Operating Cost Trend Profitability Trend

0

200

400

600

800

1,000

2008A 2009A 2010F 2011F 2012F

RM m

-0.2%

4.8%

9.8%

14.8%

19.8%

Total Revenue Revenue Growth (%) (YoY)

0100200300400500600700800900

2008A 2009A 2010F 2011F 2012F

Other Operating Expenses (-)Cost of Goods Sold (-)

0

20

40

60

80

100

120

140

160

2008A 2009A 2010F 2011F 2012F(50%)

(30%)

(10%)

10%

30%

50%

70%

Net Profit (After-extraordinaries)Net Profit Growth (%) (YoY)

Company Focus

Faber Group

Financials – Balance Sheet Strong balance sheet. As at end-FY09, the Group has a strong balance sheet with a net cash of 34.5sen per share.

For now, we have not imputed any new debt going forward as we believe this will be dependent on the amount needed to be spent for land acquisitions.

FY Dec (RM m) 2007A 2008A 2009A 2010F 2011F 2012F

Net Fixed Assets 141 127 146 172 195.0 215 Invts in Assocs & JVs 0 0 0 0 0 0 Other LT Assets 18 46 44 43 41 40 Cash & ST Invts 219 312 305 381 469 378 Inventory 9 16 4 5 5 5 Debtors 227 207 354 391 418 440 Other Current Assets 277 51 38 38 38 38 Total Assets 890 759 891 1,029 1,167 1,115 ST Debt

2 3 2 2 2 2 Other Current Liab 277 186 249 276 292 304 LT Debt 198 187 178 184 191 5 Other LT Liabilities 10 6 6 16 26 37 Shareholder’s Equity 296 318 389 459 537 620 Minority Interests 106 59 67 92 119 147 Total Cap. & Liab. 890 759 891 1,029 1,167 1,115 Leverage Analysis (x) Net Interest Cover 42.9 N/A 124.9 142.4 N/A N/A EBITDA Gross Interest Cover 22.3 16.0 24.3 24.2 25.5 26.2 Total Debt to EBITDA 1.1 1.5 1.1 1.1 1.0 0.0 Total Debt to Total Assets 0.2 0.3 0.2 0.2 0.2 0.0 Total Debt to Capital 0.5 0.5 0.4 0.3 0.3 0.0 Net Debt to Equity CASH CASH CASH CASH CASH CASH Net Debt to Equity ex MI (0.1) (0.4) (0.3) (0.4) (0.5) (0.6) Capex to Debt 0.2 0.2 0.2 0.3 0.3 6.8 Liquidity Analysis (x) Cash Ratio 0.8 1.7 1.2 1.4 1.6 1.2 Current Ratio 2.6 3.1 2.8 2.9 3.2 2.8 Quick Ratio 1.6 2.8 2.6 2.8 3.0 2.7


Breakdown of Assets (2010) Breakdown of Capital (2010) Financial Leverage & Net Debt to Equity

Net Fixed Assets - 18.1%

Bank, Cash and Liquid

Assets - 40.2%

Inventory - 0.5%

Debtors - 41.2%

Common Shareholders' Equity -

68.4%

ST Debt - 0.3%

LT Debt - 31.2%

130

180

230

280

330

380

430

2008A 2009A 2010F 2011F 2012F1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

Net Debt/(Cash) Net Debt to Equity (X) (R.H.S)Financial Leverage (X) (R.H.S)

Company Focus

Faber Group

Financials – Cash Flow

Stable operating cash flow. We project Faber to record stable operating cash flow of between RM130m and RM160m per year over FY10F-12F, as bulk of earnings will be generated from the fixed FM concession. Minimal capex for FM but cash may be used for future land acquisitions. We estimate RM15m-RM20m of maintenance capex each year for its FM division. But FY10-11F may see higher capex for the construction of a laundry plant. The plant, which cost RM15m, is scheduled to be completed within 18 months. We understand that the Group has no

plans to build plants overseas at this juncture. Instead Faber will focus on building its human capital needs for the overseas projects. Cash redemptionof RSLS. As part of the debt restructuring exercise (which took place in 2000-04) to regularise Faber’s financial position, the Group had issued RM185.5m nominal value of Redeemable Secure Loan Stocks (RSLS) in Sep 2004 as partial settlement to a special purpose vehicle, Jeram Bintang Sdn Bhd. The RSLS will be redeemed upon maturity i.e. in 2012. Given Faber’s cash-rich position, we believe that the Group has no issue in redeeming the RSLS.

FY Dec (RM m) 2007A 2008A 2009A 2010F 2011F 2012F

Pre-Tax Profit 139 205 141 148 162 174 Dep. & Amort. 36 23 21 24 27 30 Tax Paid (41) (30) (35) (37) (41) (43) Assoc. & JV Inc/(loss) 0 0 0 0 0 0 Chg in Wkg.Cap. (22) (16) (71) (10) (12) (10) Other Operating CF 17 (60) 9 7 7 7 Net Operating CF 129 122 64 131 144 158 Capital Exp.(net) (35) (32) (36) (50) (50) (50) Other Invts.(net) 0 (86) 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF 4 224 5 5 5 5 Net Investing CF (32) 105 (30) (45) (45) (45) Div Paid (13) (15) (29) (16) (17) (19) Chg in Gross Debt (32) (16) (10) 7 7 (186) Capital Issues 0 (111) 0 0 0 0 Other Financing CF (9) 9 (2) 0 0 0 Net Financing CF (54) (133) (41) (10) (10) (204) Net Cashflow 44 94 (7) 76 88 (92) Opg CFPS (sen) 41.6 37.9 37.2 38.9 42.9 46.2 Free CFPS (sen) 25.9 24.7 7.7 22.3 25.8 29.7 Source: Company, DBS Vickers

Cash Flow Trend Free Cash Flow Per Share Free Cash Flow As At Year End

-274

-174

-74

26

126

226

2008A 2009A 2010F 2011F 2012F

CF from Op CF from Invt CF from Fin

0.06

0.11

0.16

0.21

0.26

0.31

0.36

0.41

0.46

0.51

2008A 2009A 2010F 2011F 2012F

Free Cash Flow Per Share Free Operating Cash Flow Per

20

40

60

80

100

120

140

160

180

200

2008A 2009A 2010F 2011F 2012F

Company Focus

Faber Group

Financials – ROE Drivers

FY Dec 2007A 2008A 2009A 2010F 2011F 2012F

Profitability Ratios Sales Growth (%) 13.3 (0.2) 20.5 10.5 7.0 5.2 Gross Margin (%) 29.6 29.6 30.4 29.8 30.6 31.2 Operating Margin (%) 20.7 15.9 17.7 16.7 17.0 17.2 Net Profit Margin (%) 13.2 23.3 10.3 9.7 10.0 10.1 ROAE (%) 31.6 50.7 23.4 20.3 19.0 17.6 ROA (%) 10.1 18.9 10.0 9.0 8.6 8.9 ROCE (%) 18.1 15.3 17.6 16.0 14.9 15.3 Activity Ratios Debtors Turn (average days) 112.0 118.5 127.1 152.6 155.0 156.3 Creditors Turn (average days) 167.7 156.0 141.2 154.4 158.7 160.3 Inventory Turn (average days) 12.0 10.1 6.8 2.7 2.8 2.8 Total Asset Turnover (x) 0.8 0.8 1.0 0.9 0.9 0.9 Fixed Asset Turnover (x) 2.8 5.0 5.9 5.6 5.2 4.9 Source: Company, DBS Vickers

ROAE / ROAA Trend (%) Margin Trend (%) Total Debt & Gross Interest Cover

8.0%

13.0%

18.0%

23.0%

28.0%

33.0%

38.0%

43.0%

48.0%

53.0%

2008A 2009A 2010F 2011F 2012F

Ret on Avg Equity (ROAE) % Ret on Avg Assets (ROAA) %

0%

5%

10%

15%

20%

25%

30%

2008A 2009A 2010F 2011F 2012F

EBITDA Margin % EBIT Margin % Net Income Margin %

0

50

100

150

200

2008A 2009A 2010F 2011F 2012F11.2x

13.2x

15.2x

17.2x

19.2x

21.2x

23.2x

Total Debt (+) Gross Interest Cover (X) (YoY)

Company Focus

Faber Group

Valuation One of the cheapest GLC. The stock is trading at a low 8.8x CY11F EPS, making it one of the cheapest GLC. We believe this is unjustified given Faber’s resilient earnings, with more upside potential from the overseas venture particularly UAE. We believe that the renewal of the government’s concession is highly likely and therefore, will enhance Faber’s long-term earnings visibility.

Initiate with a Buy call for Faber and RM3.55 SOP-derived TP, implying 13.6x FY11F EPS and 2.4x FY11F BV. We believe the stock is grossly undervalued considering its long-term cash-rich FM concession as well as potential growth coming from the overseas expansion. Excluding net cash of 34.5sen, the stock is only trading at 7.5x FY11F EPS and 1.3x FY11F BV. We value the FM business based on DCF method (WACC: 11.6%; terminal growth: 1.0%) given the long earnings visibility. Meanwhile, the property segment is valued based in 10x CY11F EPS, consistent with the average small-mid cap property peers’ valuation.

Valuation

IFM Valuation using DCF method:

FYE Dec (RM 'mil) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020EBIT 132 142 149 155 162 168 175 181 188 194 198 Add Depreciation and Amortisation 34 39 43 48 53 59 65 70 77 84 91 Less Tax Provision (30) (33) (34) (36) (37) (39) (40) (42) (43) (45) (46) Less Capex (48) (48) (48) (57) (57) (67) (67) (67) (95) (95) (95) Add changes in Working Capital (10) (11) (9) (9) (10) (10) (10) (11) (12) (12) (11) Total FCF to the Firm 78 90 101 101 111 112 122 132 115 126 138 Discounted FCF 78 80 81 73 71 65 63 61 48 47 46

Terminal Growth 1.0%PV of FCF 713 PV of Terminal Value 431 Net Cash (Debt) 10 Equity Value (RM 'mil) 1,155

No of shares (mil) 363.001

Value Per Share (RM) 3.18

Sum-of-parts valuation for Faber:

Business segment Value/share (RM) MethodIFM 3.18 DCF (WACC:12%; terminal growth: 1%)Property 0.37 10x CY11F PE

3.55 Source: DBS Vickers

Peer comparison. Although Faber does not have direct comparable peers, we have included a peer comparison table below for reference. The companies listed below are not directly comparable to Faber as they are involved in other non-FM business and not in similar healthcare

FM sector. Nonetheless, Faber still trades at a lower CY11F PE ratio (35% discount) compared to the peers’ average of 13.2x. Our TP of RM3.55 implied CY11F PE of 13.6x.

Peers comparison

Local Crncy Mkt Cap

(US$ mil)

Last Price

(local crncy)

CY10 PE

(x)

CY11 PE

(x)

FY11 P/BV

(x)

Zhongtian Urban Dev Group CNY 1,542 18.44 16.7 9.6 3.0 Spotless Group AUD 669 2.85 11.8 10.3 1.4 Daibiru Corp JPY 948 750.00 23.1 21.0 0.7 Mortice GBp 34 48.00 n.a. 56.0 n.a. Faber Group MYR 253 2.31 9.7 8.8 1.6

Average (excl. Faber) 17.2 13.6 1.7

Source: Bloomberg, DBS Vickers

Company Focus

Faber Group

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10 to +15% total return over the next 12 months for small caps, -10 to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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Company Focus

Faber Group

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