PP 7767/09/2010(025354)

31 May 2010
RHB Research
Malaysia Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Upda te 31 May 2010

MARKET DATELINE

Fajarbaru Builder Group Share Price

Fair Value
:
:
RM0.965
RM1.31
To Embark On A Greenfield Hotel Project In Melaka 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 6.4 - - 3.0 1.2 17.8 Cash 5.7
2010f 176.4 22.4 13.6 (10.1) 7.1 11.6 - 16.2 1.3 19.0 Cash 5.7
2011f 263.0 28.0 16.1 18.1 6.0 14.5 - 11.1 1.2 20.2 Cash 5.7
2012f 374.0 35.9 19.5 21.2 4.9 18.5 - 7.8 1.1 21.5 Cash 5.7
Main Market Listing /Non-Trustee Stock /Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES

♦ RM15m for 3.5-acre land in Pulau Melaka. Fajarbaru has proposed to Issued Capital (m shares) 166.2
acquire from three individuals the entire equity interest in Temasek Perkasa Market Cap(RMm) 160.4
Sdn Bhd (Temasek Perkasa) for RM15m. Temasek Perkasa owns 3.5 acres Daily Trading Vol (m shs) 0.7

of land with sea frontage in Pulau Melaka, Melaka. We understand that 52wk Price Range (RM) 0.84-1.25
Major Shareholders: (%)
Fajarbaru has plan to put in another RM55-65m to build a “high-end” hotel
Big Victory Holdings 13.3
on the site.
Dato’ Ir Low Keng Kok 7.3
♦ Investment case for hotels in Melaka. Based on the statistics we Tan Sri Chai Kin Kong 6.5
gathered, there appears to be a decent investment case for hotels in Melaka,
FYE Jun FY10 FY11 FY12
particularly, 5-star hotels, as: (1) Melaka’s tourist arrivals grew at a much
EPS Revision (%) - - -
stronger pace vis-à-vis the number at the national level; (2) Melaka reported Var to Cons (%) - - -
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 during PE Band Chart
the global financial crisis; and (3) The 5-star hotel segment in Melaka has
PER = 10x
not been fully exploited. PER = 8x
PER = 6x
♦ Investment eats into cash reserves. Ceteris paribus, the land acquisition
will reduce Fajarbaru’s net cash of RM123.7m or 74sen/share as at 31 Mar
2010 to RM108.7m or 65sen/share. Assuming a building cost of RM55-65m,
its net cash will drop further to RM43.7-53.7m or 26-32sen/share.
♦ Forecasts. Maintained as the project will take at least 2-3 years to
complete. Relative Performance To FBM KLCI

♦ Risks. The risks include: (1) New contracts secured in FY06/11-12 coming in
below our target of RM400m per annum; and (2) Rising input costs.
FBM KLCI
♦ We are Neutral on the construction sector. On one hand, we foresee
improved investors’ risk appetite for construction stocks following: (1) The
massive underperformance of the sector vis-à-vis the market in 4Q2009 and Fajarbaru
1Q2010; and (2) A better sector news flow and new expectations leading up
to the announcement of the 10th Malaysia Plan (10MP) in June 2010. On the
other hand, certain negative elements remain such as: (1) The still slow pace
of the roll-out of public projects, shrinking margins and declining dominance
of established players in large-scale projects locally; and (2) The not-so-rosy
outlook and increased operating risks in key overseas markets.
♦ Maintain Outperform. However, we are positive on Fajarbaru due to its
still undemanding valuations. Its balance sheet is strong with a net cash of
RM123.7m as at 31 Mar 2010, translating to a whopping 74sen/share. Joshua CY Ng
(603) 92802151
Indicative fair value is RM1.31 based on 10x fully-diluted CY10 EPS of
joshuang@rhb.com.my
13.1sen, in line with our benchmark 1-year forward target PER for the
construction sector of 10-14x.

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 31 May 2010

To Embark On A Greenfield Hotel Project In Melaka

♦ RM15m for 3.5-acre land in Pulau Melaka. Fajarbaru has proposed to acquire from three individuals the
entire equity interest in Temasek Perkasa Sdn Bhd (Temasek Perkasa) for RM15m. Temasek Perkasa owns 3.5
acres of land with sea frontage in Pulau Melaka, Melaka. 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”).

Image 1: Pulau Melaka

Source: Google

♦ Premium land price justifiable. The deal values the land at about RM98 psf. This is at a premium to the
asking prices of two comparable land parcels currently in the market that we are aware of, namely:
1. A 3.16-acre land in Pulau Melaka (without sea frontage) at RM7m or RM51 psf; and
2. A 1.04-acre land with sea frontage in Tanjung Kling, 15km away from Melaka town centre, sub-divided into
15 plots at RM50-65 psf (depending on the proximity to the beach).

We believe the premium valuation of the Temasek Perkasa land over the comparable land parcel in Pulau Melaka
is justifiable given the sea frontage of the Temasek Perkasa land. Similarly, we believe the premium valuation of
the Temasek Perkasa land over the comparable land parcel in Tanjung Kling with sea frontage is justifiable given
the Temasek Perkasa land’s proximity to Melaka town centre.

♦ To build a “high-end” hotel. We understand that Fajarbaru has plan to put in another RM55-65m to build a
“high-end” hotel on the site. This should not come as a surprise to us as the company did mention to us and
investors before that it was looking at a hotel project in Melaka. Given a soft hotel sector (or perception of a soft
hotel sector) in Malaysia, the feeback was generally less than enthusiastic. Nonetheless, it now appears that
Fajarbaru is going ahead with the project, making us wondering if we have missed out on the investment case for
a 5-star hotel in Melaka.

♦ Investment case for hotels in Melaka. Based on the statistics we gathered, there appears to be a decent
investment case for hotels in Melaka, particularly, 5-star hotels, as:
1. Melaka’s tourist arrivals grew at a much stronger pace vis-à-vis the number at the national level;
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 during the global financial crisis; and
3. The 5-star hotel segment in Melaka has not been fully exploited.

♦ Stronger tourist arrivals vis-à-vis 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 7.3% achieved at the national level from 22m to 23.6m (see
Chart 1).

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 31 May 2010

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

♦ Highest growth in room rate, among the most resilient in occupancy. 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 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).

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

♦ Shortage of 5-star hotels in Melaka. At present, of the total hotel rooms in Melaka, only 22.2% are 5-star
rated. This is low vis-à-vis other key tourism-based states in Malaysia such as Kedah (37.7%), Penang (25.8%)
and Sabah (45.3%) (see Table 3). This points to a 5-star hotel segment in Melaka that is still not fully exploited.
Given the right government initiatives and private sector investments, more rich and famous can be lured to
Melaka (like what Pangkor Laut in Perak can do, for instance). Incidentally, the Temasek Perkasa land is located
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

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 31 May 2010

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.

Table 3: 5-Star Rooms As A Percentage Of Total Rooms

State Total 5-Star 5-Star as %
(rooms) (rooms) of total
Kedah 4,717 1,776 37.7
Penang 9,626 2,481 25.8
Melaka 3,559 790 22.2
Terengganu 2,704 341 12.6
Sabah 6,374 2,890 45.3
Source: Malaysian Association Of Hotels

♦ Investment eats into cash reserves. Ceteris paribus, the land acquisition will reduce Fajarbaru’s net cash of
RM123.7m or 74sen/share as at 31 Mar 2010 to RM108.7m or 65sen/share. Assuming a building cost of RM55-
65m, its net cash will drop further to RM43.7-53.7m or 26-32sen/share.

♦ Forecasts. Maintained as the project will at least take 2-3 years to complete.

♦ Risks. The risks include: (1) New contracts secured in FY06/11-12 coming in below our target of RM400m per
annum; and (2) Rising input costs.

♦ We are Neutral on the construction sector. On one hand, we foresee improved investors’ risk appetite for
construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in 4Q2009
and 1Q2010; and (2) A better sector news flow and new expectations leading up to the announcement of the
10th Malaysia Plan (10MP) in June 2010. On the other hand, certain negative elements remain such as: (1) The
still slow pace of the roll-out of public projects, shrinking margins and declining dominance of established players
in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key overseas
markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases).

♦ Maintain Outperform. However, we are positive on Fajarbaru due to its still undemanding valuations. Its
balance sheet is strong with a net cash of RM123.7m as at 31 Mar 2010, translating to a whopping 74sen/share.
Indicative fair value is RM1.31 based on 10x fully-diluted CY10 EPS of 13.1sen, in line with our benchmark 1-year
forward target PER for the construction sector of 10-14x.

Table 4 : Outstanding Orderbook

Project Outstanding value
(RMm)
Seremban-Gemas double-tacking (KM502.6-KM535.5) 226
Tampin Hospital 131
Aqua-culture project in Terengganu 70
Total 427
Source: Company, RHBRI

Table 5: Earnings Forecasts Table 6: Forecast Assumptions

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

Turnover 184.6 176.4 263.0 374.0 Construction EBIT margin (%) 15.0 13.3 12.1
Turnover growth (%) 110.8 -4.5 49.1 42.2 New orderbook secured (RMm) 70 400 400

EBITDA 20.5 27.1 35.5 45.7

EBITDA margin (%) 11.1 15.3 13.5 12.2

Depreciation -0.6 -0.6 -0.6 -0.6

Net Interest 1.6 2.2 2.5 2.8
Associates 0.0 0.0 0.0 0.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 21.5 28.7 37.4 47.9

Tax -3.4 -6.3 -9.3 -12.0
PAT 18.1 22.4 28.0 35.9
Minorities 0.0 0.0 0.0 0.0
Net Profit 18.1 22.4 28.0 35.9
Source: Company data, RHBRI estimates

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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may from time to time have an interest in the securities mentioned by this report.

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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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 FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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 FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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

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

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