PP 7767/09/2010(025354)

14 July 2010

Malaysia Corporate Highlights

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

V is it Note
14 July 2010
MARKET DATELINE

Fajarbaru Builder Group Share Price

Fair Value
:
:
RM0.95
RM1.39
Greenfield Hotel Project In Melaka A Safe Bet Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (FAJAR; Code: 7047) Bloomberg: FBC MK

Net FD Net
FYE Turnov Profit# EPS# Growth PER EPS# C.EPS* P/CF P/NTA ROE Gearing GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (sen) (x) (x) (%) (%) (%)
2009 184.6 18.1 15.2 56.3 6.3 - - 3.0 1.2 17.8 Cash 5.8
2010f 176.4 22.4 13.6 (10.1) 7.0 11.6 - 16.0 1.3 19.0 Cash 5.8
2011f 233.0 25.6 14.7 7.7 6.5 13.2 - 13.1 1.2 18.8 Cash 5.8
2012f 284.0 28.5 15.5 5.3 6.1 14.7 - 11.4 1.1 18.1 Cash 5.8
Main Market Listing /Non-Trustee Stock /Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ Greenfield hotel project a safe bet. Fajarbaru is projecting about RM70m Issued Capital (m shares) 166.2
GDV from the 3.5-acre land with sea frontage in Pulau Melaka it is acquiring Market Cap (RMm) 157.9
for RM15m cash, comprising a 4-star hotel with about 300 rooms (RM50m) Daily Trading Vol (m shs) 0.7
and some retail shops next to it (RM20m). Fajarbaru intends to hold the 52wk Price Range (RM) 0.87-1.25
hotel as an investment property with a fixed return. This can be achieved Major Shareholders: (%)
via the wholesale of the hotel rooms to tour operators on a long-term basis. Big Victory Holdings 13.1
Tan Sri Chai Kin Kong 7.4
For the retail shops, Fajarbaru intends to sell them at a profit and use the
Dato’ Ir Low Keng Kok 7.2
cash flow generated to part finance the development of the hotel. Also, the
construction of the hotel and retail shops will translate to construction work FYE Jun FY10 FY11 FY12
to Fajarbaru. EPS Revision (%) - -9* -21*
♦ Local construction market remains highly competitive. Fajarbaru felt Var to Cons (%) - - -
*Already reflected in Market Outlook &
that the flow of small-scale public jobs has improved in recent months, as
Strategy 2H2010 dated 30 Jun 2010
evidenced in its staff members having to “work over weekends to get tender
PE Band Chart
documents ready for submission”. However, for now, it will rather stay
conservative as far as job wins are concerned as severe price undercutting
PER = 9x
remains the order of the day in the market. Not helping either, we believe, PER = 7x
PER = 5x
is the “lobbying” element that is making a quiet comeback as a force to be
reckoned with.
♦ Forecasts. In our Market Outlook & Strategy 2H2010 Report dated 30 Jun
2010, we already reduced FY06/11-12 net profit forecasts by 9% and 21%,
having cut our assumption on new contracts secured in FY06/11-12 to
RM250m p.a. from RM400m previously. Our forecasts have yet to reflect Relative Performance To FBM KLCI
any contribution from the proposed hotel and retail shops in Melaka.
♦ Risks. The risks include: (1) New contracts secured in FY06/11-12 coming in
below our target of RM250m per annum; and (2) Rising input costs. Fajarbaru Builder

♦ Maintain Outperform. We are upbeat on the construction sector as we

foresee construction stocks to generally outperform the market in 2H2010, FBM KLCI
buoyed by news flow, particularly, from: (1) The RM36bn KL mass rapid
transit (MRT) project; (2) The RM7bn Ampang and Kelana Jaya light rail
transit (LRT) line extension project; and (3) Federal land deals. Fajarbaru,
via Fajarbaru Builder Sdn Bhd – Signatium Construction Sdn Bhd JV, has
been pre-qualified to bid for the LRT line extension project as the main
contractor as well as segmental box girder sub-contractor. Also, additional
kickers will come from its still undemanding valuations, coupled with a strong
balance sheet with a net cash of RM123.7m as at 31 Mar 2010, translating to Joshua CY Ng
a whopping 74sen/share. Indicative fair value is RM1.39 based on 10x fully- (603) 92802151
diluted CY11 EPS of 13.9sen, in line with our benchmark 1-year forward joshuang@rhb.com.my
target PER for the construction sector of 10-16x.

Please read important disclosures at the end of this report.

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Greenfield Hotel Project In Melaka A Safe Bet

♦ Highlights. Key takeaways from our recent meeting with Fajarbaru are:
1. The greenfield hotel project in Melaka appears to be a safe bet given that its rooms will be sold to tour
operators on a wholesale and long-term basis, and that the development also includes retail shops for sale;
and
2. While the flow of small-scale public jobs has improved in recent months, Fajarbaru will rather stay
conservative as far as job wins are concerned due to severe price undercutting, coupled with, we believe, the
“lobbying” element that is making a quiet comeback to the market as a force to be reckoned with.

♦ Greenfield hotel project a safe bet. Fajarbaru is projecting about RM70m GDV from the 3.5-acre land with
sea frontage in Pulau Melaka it is acquiring for RM15m cash, comprising a 4-star hotel with about 300 rooms
(RM50m) and some retail shops next to it (RM20m). To recap, Pulau Melaka is a man-made island off the coast
of Melaka town centre, connected to the main land by a causeway (see Image 1, Pulau Melaka is marked “A”),
while the exact location of the land is just next to the proposed RM1.2bn Arab City in Pulau Melaka, Klebang and
Kampung Jawa, by a JV between the Melaka state government and Arab and local businessmen (Arab City will
boast, among others, retail lots offering goods from the Middle East, restaurants specialising in Middle-Eastern
cuisines, a museum “with genuine Egyptian artifacts”, a 5-star hotel, a water theme park and an aquarium).

Image 1: Pulau Melaka

Source: Google

♦ For the hotel, we understand that Fajarbaru’s intention is to hold it as an investment property with a fixed return.
This can be achieved via the wholesale of the hotel rooms to tour operators on a long-term basis. We understand
that in the first place, the project is driven by the demand for 4-star hotel rooms in Melaka by these tour
operators. It makes sense for these tour operators to replace one of the few nights stay in KL with one in Melaka
in their Malaysia holiday packages to cut cost while making the packages more exotic. For the retail shops, we
understand that Fajarbaru’s idea is purely property development, i.e. to develop and sell them at a profit. The
cash flow generated will be used to part finance the development of the hotel. Also, the construction of the hotel
and retail shops will translate to construction work to Fajarbaru.

♦ On the investment case for a hotel in Melaka, to recap, based on the statistics we gathered, there appears to be a
decent one as:

1. Melaka’s tourist arrivals grew at a much stronger pace vis-à-vis the number at the national level. Between
2006 and 2009, Melaka’s tourist arrivals grew at a CAGR of 20.4% from 5.1m to 8.9m, much superior than
10.6% achieved at the national level from 17.5m to 23.6m. Zooming in on 2009, against the backdrop of the
global financial crisis, Melaka’s tourist arrivals still jumped 23.6% to 8.9m from 7.2m in 2008, beating the
7.3% achieved at the national level from 22m to 23.6m (see Chart 1); and

2. Melaka reported the highest growth in average room rate and was among the most resilient in average hotel
occupancy rate among the states in Malaysia in 2009. Against a backdrop of the global financial crisis,
Melaka still managed to chalk up an impressive 27.3% growth in average hotel room rate in 2009, making it

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 14 July 2010

the best performing state in terms of average hotel room rate growth in Malaysia. While all states reported
lower average hotel occupancy rates in 2009 vis-à-vis 2008, Melaka was the third lowest in terms of %-point
decline at only 2.9%-points (see Table 2).

Chart 1: Tourist Arrivals

25 2 3 .6
2 2 .0
2 0 .9

20
1 7 .5

15
(m)

10 8 .9
7 .2
6 .0
5 .1
5

0
2006 2007 2008 2009
Malaysia Melaka

Source: www.tourism.gov.my, www.asmaliana.com

Table 2: Average Hotel Occupancy & Room Rates

State Average Room Rate Average Occupancy Rate
2008 2009 Chg 2008 2009 Chg
(RM/room) (RM/room) (%) (%) (%) (%-pts)
Perlis 83.0 na na 66.0 na na
Kedah 519.6 642.7 23.7 65.7 62.0 (3.7)
Penang 244.5 232.0 (5.1) 64.7 61.5 (3.2)
Perak 173.2 161.3 (6.9) 52.5 51.8 (0.7)
Selangor 209.3 191.9 (8.3) 67.5 66.1 (1.4)
Kuala Lumpur 183.5 221.2 20.5 68.5 63.8 (4.6)
N Sembilan 205.8 202.3 (1.7) 58.3 52.5 (5.8)
Melaka 145.8 185.5 27.3 62.6 59.7 (2.9)
Johor 143.9 161.2 12.0 63.1 56.6 (6.4)
Pahang 88.8 84.1 (5.3) 83.1 78.0 (5.1)
Terengganu 117.0 144.1 23.2 71.4 62.4 (9.1)
Kelantan 182.0 143.7 (21.1) 60.2 40.8 (19.4)
Sarawak 169.7 161.6 (4.7) 58.0 45.6 (12.4)
Sabah 243.0 287.1 18.1 70.1 56.3 (13.8)
Labuan 262.9 256.9 (2.3) 81.0 75.8 (5.2)
Putrajaya na 156.0 na na 23.1 na
Malaysia 199.6 195.8 (3.8) 66.3 60.7 (5.6)
Source: Malaysian Association Of Hotels

♦ Local construction market remains highly competitive. Fajarbaru felt that the flow of small-scale public
jobs has improved in recent months, as evidenced in its staff members having to “work over weekends to get
tender documents ready for submission”. However, for now, it will rather stay conservative as far as job wins are
concerned as severe price undercutting remains the order of the day in the market. Not helping either, we
believe, is the “lobbying” element that is making a quiet comeback as a force to be reckoned with.

♦ Forecasts. In our Market Outlook & Strategy 2H2010 Report dated 30 Jun 2010, we already reduced FY06/11-
12 net profit forecasts by 9% and 21%, having cut our assumption on new contracts secured in FY06/11-12 to
RM250m p.a. from RM400m previously. Our forecasts have yet to reflect any contribution from the proposed
hotel and retail shops in Melaka.

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 14 July 2010

♦ Risks. The risks include: (1) New contracts secured in FY06/11-12 coming in below our target of RM250m per
annum; and (2) Rising input costs.

♦ Maintain Outperform. We are upbeat on the construction sector as we foresee construction stocks to generally
outperform the market in 2H2010, buoyed by news flow, particularly, from: (1) The RM36bn KL mass rapid
transit (MRT) project; (2) The RM7bn Ampang and Kelana Jaya light rail transit (LRT) line extension project; and
(3) Federal land deals. Fajarbaru, via Fajarbaru Builder Sdn Bhd – Signatium Construction Sdn Bhd JV, has been
pre-qualified to bid for the LRT line extension project as the main contractor as well as segmental box girder sub-
contractor. Also, additional kickers will come from its still undemanding valuations, coupled with a strong balance
sheet with a net cash of RM123.7m as at 31 Mar 2010, translating to a whopping 74sen/share. Indicative fair
value is RM1.39 based on 10x fully-diluted CY11 EPS of 13.9sen, in line with our benchmark 1-year forward
target PER for the construction sector of 10-16x.

Table 3 : Outstanding Orderbook

Project Outstanding Value
(RMm)
Seremban-Gemas double-tracking (KM502.6-KM535.5) 200
Tampin Hospital 128
Aqua-culture project in Terengganu 69
Total 397
Source: Company

Table 4: Earnings Forecasts Table 5: Forecast Assumptions

FYE Jun (RMm) FY09a FY10F FY11F FY12F FYE Jun FY10F FY11F FY12F

Turnover 184.6 176.4 233.0 284.0 Construction EBIT margin (%) 15.0 13.5 12.4
Turnover growth (%) 110.8 -4.5 32.1 21.9 New orderbook secured (RMm) 70 250 250

EBITDA 20.5 27.1 32.2 35.8

EBITDA margin (%) 11.1 15.3 13.8 12.6

Depreciation -0.6 -0.6 -0.6 -0.6

Net Interest 1.6 2.2 2.5 2.7
Associates 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 21.5 28.7 34.1 37.9

Tax -3.4 -6.3 -8.5 -9.5
PAT 18.1 22.4 25.6 28.5
Minorities 0.0 0.0 0.0 0.0
Net Profit 18.1 22.4 25.6 28.5
Source: Company data, RHBRI estimates

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 14 July 2010

Chart 2: Fajar Technical View Point

♦ The share price of Fajar hit a multi-year high of
RM1.29 in Aug 2009, after a powerful rally from
Dec 2008.

♦ However, almost immediately, the stock triggered a

steady stream of selling momentum, resulting in it
losing the RM1.23 level, prior to a steeper fall in
Dec 2009 to below the RM1.10 level.

♦ The stock tried to regain the level, but the situation

did not improve.

♦ It had another round of selldown in May 2010,

before a subsequent struggle to cling near to the
support level of RM0.96 in recent sessions.

♦ Yesterday, the stock rebounded and touched a day

high of RM0.96, before closing the day at RM0.935
with a “long-legged doji” candle on the chart.

♦ Technically, the pattern suggests volatile trading

ahead.

♦ If it fails to recapture RM0.96 and the 40-day SMA

nearby soon, its outlook will stay bearish for the
near to medium term period.

♦ The next support is seen only at RM0.86, but a

higher resistance is at RM1.10.

IMPORTANT DISCLOSURES

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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.

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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 KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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

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

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