Fajarbaru lands RM300m LRT depot contract

Fajarbaru Builder Group Bhd (May 4, 96.5 sen)
Upgrade to outperform with fair value of RM1.10 from RM1.04: Fajarbaru has secured a RM299.8 million contract for the construction of the Kampung Kuala Sungai Baru depot under Package B of the Ampang LRT line extension project.

This is the fifth key contract Fajarbaru has secured in FY12 ending June, boosting its YTD new contracts secured from RM368 million to RM668 million and outstanding construction order book by 46% from RM625 million to RM925 million.

Assuming an earnings before interest and tax (Ebit) margin of 6% to 8%, the contract will fetch RM18 million to RM24 million Ebit over the 30-month construction period.

We gathered from Fajarbaru during a recent visit that it expects to put onto the market by mid-2013 a high-rise condominium project in the Bandar Kinrara/Jalan Puchong area and by 1Q13 a high-rise serviced apartment project in the Sentul/Jalan Ipoh area.

Its move into property development generates internal works for the construction division while property profit is a good buffer against the more cyclical construction profit.

FY13/FY14 net profit forecasts are raised by 11% to 15%, having reflected RM668 million new jobs in FY12 against RM368 million previously. The risks include: (i) new contracts secured in FY13/FY14 coming in below our targets of RM300 million per year; and (ii) escalation of input costs.

We are less enthusiastic on construction stocks as we believe their share price performance is likely to be capped over the next 6 to 12 months as the market begins to price in a higher risk premium for construction stocks ahead of the general election that will have to be held by March 2013. However, Fajarbaru's valuations have become attractive after the latest earnings upgrade.

Indicative fair value based on sum-of-parts is raised by 6% from RM1.04 to RM1.10, valuing Fajarbaru's construction business at 10 times revised fully-diluted CY12 earnings per share of 6.7sen, in line with our benchmark one-year forward target price earnings ratio for the construction sector of 10 to 14 times, and its property business based on discounted cash flow.

Upgrade to "outperform" from "market perform". — RHB Research Institute, May 4