Faber- losing its plot

Results Update

For QE30/9/2011, Faber reported a net loss of RM26 million on a turnover of RM309 million. Its turnover increased by 66% q-o-q or 34% y-o-y due to the recognition of revenue of RM107.7 million from IFM non-concession projects in UAE. This revenue "was on the works order issued prior to the expiry of contract (as announced by Faber on January 12, 2011) where works & documentation for invoicing were fully completed post expiry of the contracts". I am quite perplexed by the extremely tortured English used here (see Item 22 of Page 14 of the Notes to the Accounts) to explain something which should be quite obvious, that's to say that, works order must be issued prior to the expiry of any contract and some works & documentation for invoicing can be completed after the contract has expired. So, what's the point to this statement?

The best is yet to come- the reason for the net loss. The loss arose because "recognition of cost amounting to RM44.5 million for works completed for the projects in UAE where the corresponding revenue was not recognized as it cannot be measured reliably." This gives rise to two questions; firstly, how do you get into a contract where the revenue cannot be measured reliably, and secondly, how do you get paid for such work?

In addition, Faber has provided for an impairment loss of RM12.9 million from its dealing with the principal, WRM where the loss is arrived at by comparing "the carrying amount and the present value of the estimated future cashflow discounted at the financial assets original effective interest rates." This contract was not renewed on its expiry date on January 12, 2011 (see below). Did Faber make this provision because it might not be paid? WRM or Western Region Municipality is one of the municipals in UAE. This goes to show that any business dealings in Middle Eastern countries must be treated with caution.


Table 1: Faber's last 8 quarterly results



Chart 2: Faber's last 19 quarterly results

Not again!

Sometime back I have posted a piece on Faber entitled "Faber- now you see it, now you don't" which dealt with Faber's less-than straightforward dealing with the investing public. To wit:

Faber has just announced its results for QE28/2/2010 and it is a HUGE DISAPPOINTMENT! Even though, the results was an improvement over the results of the previous corresponding quarter, it was substantially lower than the immediate preceding quarter, with net profit lower by 66% to RM14.4 million & turnover lower by 39%.

Now, we learned that the big jump in the immediate preceding quarter, QE30/11/2009 was attributable to the higher revenue from Integrated Facilities Management ('IFM') Concession which was mainly due to one-off revenue received from hospital for the claim for linen loss. In addition, it has completed a IFM maintenance contract secured earlier (see Table 2 for Note 20). In the absence of these two factors, Faber's top-line & bottom-line dropped in QE28/2/2010. None of these exceptional items were explained in the Notes accompanying the results for QE30/11/2009 (see Table 3 for Note 21). In fact, if one were to read Note 22 for QE30/11/2009, you would get a very bullish impression of the future prospect of Faber because the note insinuated the improvement was sustainable due to higher revenue from the new business in UAE & higher bed occupancy plus additional new facilities in government's hospital (see Table 3 for Note 22).

Incomplete disclosure of this nature reflects badly on the professionalism of Faber's management.

Look like the same unprofessional practice still persists in Faber.

Concession Agreement ('CA') between Faber Medi-Serve Sdn Bhd ('FMS') & Ministry of Health ('MOH')

FMS's concession to provide Hospital Support Service ('HSS') to some government hospitals under MOH had expired on Oct 28, 2011 but was extended by six months. We do not know whether FMS will get a new CA. Incidentally Faber was recently reprimanded by Bursa for failure to announce "the non-renewal of contracts awarded to the company’s subsidiary, Faber Limited Liability Company, by the Department of Municipal Affairs, Western Region Municipality, Emirate of Abu Dhabi ("WRM") as set out in the company’s announcement on 12 January 2011". For more, go here.

Valuation

I would not attempt to value this stock as too many things are up in the air.

Technical Outlook

From the chart below, Faber is still in an uptrend. It may find support at the uptrend line at RM1.10. I think this uptrend line would severely tested if Faber cannot secure a renewal of the CA for providing HSS to MOH. The decision for that should be forthcoming by April 28, 2012.


Chart 2: Faber's weekly chart as at Nov 29, 2011 (Source: Tradesignum)

Conclusion

Based on the uncertainty surrounding the continuation of its CA with the MOH & its chaotic operation in the Middle East, I think Faber is a stock to be avoided for now. If you still like to get into this stock, you may try to do so at the uptrend line support at around RM1.10. A safe bet is to wait for a favorable outcome by the MOH to renew the CA (as mentioned earlier).