KUCHING: Faber Group Bhd (Faber) will be adopting the new Financial Reporting Standard (FRS) from January 1 next year which will change the earnings outlook for the group.RHB Research Institute Sdn Bhd (RHB Research) in its research report stated it maintained this year property forecast as the change would only take place starting financial year 2011.
For next year, to be consistent with the new FRS, it had removed its revenue projections for the property segment. However, financial year 2012 forecast had been increased by 19 per cent to recognise the total value of completed property as guided by the management.
Notably, according to the new FRS IFRIC13, revenue for property projects can only be recognised upon completion of construction instead of progress billing previously.
Meanwhile, as guided by the management the research house’s previous financial year 2010 to 2012 effective tax rate assumption of 29 per cent per annum was too high. Consequently, it had revised this year’s effective tax rate to statutory tax rate of 25 per cent.
However, the research firm reduced its financial year 2011 and 2012 effective tax rate to 21 per cent per annum to reflect the higher contribution from UAE, which was tax-free.
On the other hand, as indicated previously the research house had assumed that renewal of the concession in October next year would come with a 10 per cent drop in service fees.
It had corrected the error in its assumption to reflect the price drop from November 1 next year instead of January 1 the same year. It added the impact to discounted cash flow (DCF) was minimal.
The research house happened to mention the risks to its view was the failure to secure an extension to the concession agreement with the government, delays in property launches and approvals which could affect revenues from the property segment.
Following all the changes, RHB Research had revised its financial year 2010 earnings projection upward by 8.3 per cent but reduced next year’s numbers by 18.7 per cent. Its financial year 2012 earnings forecast had been raised by 38.5 per cent.
Besides the change in the earnings forecast, it also switched its valuation methodology for property segment from price earnings (PE) to DCF in line with the sector. However, the research firm stated that this had minimal impact on its sum-of-parts (SOP) valuation, which was maintained at RM3.30 per share.
In addition, it saw very little risk for Faber to lose its concession agreement. Even if the concession were not renewed, its “worst-case” SOP valuation would amount to RM2.18 per share, which was 9.2 per cent below the current share price.
RHB Research pointed out that its valuation and fair value estimate did not include Pantai Medivest Sdn Bhd but it believed Faber stands a good chance of acquiring it given the strong financial position and good track record.