We think FAVCO FAVELLE BHD(KLSE:7229) is a promising investment without much risk incorporated into to the current price. It is currently trading around RM2.71-RM2.88 or a market capitalization of 620million. Despite the weak price of oil, Favco is still producing abnormal profit and is clearly surviving the bad days. Our analysis leads us to believe that Favco can potentially rise to about RM4. The reasons are because it is undervalued, provide a sufficient margin of safety, and have a big upside.

Valuation (or why it is undervalued)

In every bargain purchase, the valuation must catch your eye before even looking deeply into it. Please note that this valuation is based on the recent annual report (2016).

Core EBIT: 80 million

Earning Yield: 27%

EV/EBITA: 3.7x

No-growth valuation – This valuation assumes that the ROCE remains constant throughout the coming years.

The valuation shows that FAVCO is worth about RM5.8 or 1.3Billion if It constantly produce the same amount of profit consistently. This doesn’t account if the profit deteriorates or increases.

Margin of Safety

How safe is this investment? It is something most value investors will ask. It is trading on 51% discount. So, even if our valuation fails us (or we are wrong), the margin of safety will protect us from losing much. A large margin of safety also means that our return will be big if it turns out to be right.

The Upside

The tremendous cash on the balance sheet serves as a catalyst for us. With a 370million (now 400million), it can catch traders’ attention if the cash get anywhere near the current market capitalization(630million).

Also, this might be quite a wait, but if the oil’s price recover, then it is likely that FAVCO will double its share price.

While waiting for the catalysts, FAVCO’s dividend which is 15sen per share is attractive for long-term investors. We doubt the dividend will decrease in the following few years because of the large pile of cash held by the company.

Note: This is not a buy advice.

https://twentybaggers.wordpress.com/2017/06/03/value-buy-favco-favelle/