Favelle Favco Berhad: A Dividend-Focused Income Play with Undervalued Potential

Favelle Favco Berhad (KLSE: FAVCO) operates in Malaysia's construction machinery sector, a space where stable income streams and undervalued equities can thrive. This article explores FAVCO's case as an income-growth hybrid investment, leveraging its consistent earnings per share (EPS), attractive dividend yield, and below-peer valuation. However, investors must weigh these positives against structural risks like weak cash flow coverage and stagnant earnings growth.

Stable EPS Amid Sector Volatility

FAVCO's EPS has remained stable at RM0.22 for both FY 2023 and FY 2024, despite a 6.56% rise in net profit year-over-year. This reflects the company's focus on maintaining profitability in a sector that faces cyclical demand swings. While EPS growth has flattened over the past two years, three-year EPS growth averaged 374%, driven by cost discipline and operational efficiency.

However, a longer-term view reveals challenges: earnings have declined by 6% annually over the past five years, according to its Snowflake Score. This underscores a need for FAVCO to reinvent growth strategies to avoid becoming a “value trap.”

Dividend History: Consistency Amid an Outlier Year

FAVCO has prioritized shareholder returns, offering a 5.1% dividend yield at its current share price of RM1.76. The dividend per share (DPS) has been steady at RM0.09 annually since 2023, with the next payout scheduled for August 15, 2025 (ex-dividend date: July 31). This consistency contrasts sharply with 2022, when an RM0.85 interim dividend spiked the total DPS to RM0.89—a likely one-time event tied to capital returns.

Key metrics:
- Payout ratio: ~39–42% of earnings (healthy and sustainable).
- Cash payout ratio: 320.8%, indicating dividends exceed free cash flow—a critical risk.

Investors should ask: Can FAVCO maintain dividends if cash flow weakens further?

Valuation: Undervalued Relative to Peers

FAVCO's P/E ratio of 7.6x is 44% below the Malaysian market average of 13.8x and 63% below its industry's average of 20.9x. Competitors like COASTAL (8.6x) and TAS (6.9x) trade at similar or higher valuations, while BHIC (20.9x) and CHGP (47.2x) highlight sector volatility.

Additional metrics strengthen the case for undervaluation:
- Price-to-book (P/B): 0.5x (trading at a 50% discount to book value).
- EV/Revenue: 0.4x (low cost relative to sales).

Risks to Consider

1. Cash Flow Dependency: The dividend's reliance on earnings rather than cash flow raises sustainability concerns.
2. Earnings Stagnation: A 6% five-year earnings decline suggests a need for new revenue streams.
3. Leadership Transition: The retirement of director Encik Sobri Abu may introduce governance uncertainties.
4. Market Cap Liquidity: At RM414 million, FAVCO's small cap could limit liquidity for large investors.

Investment Thesis: A High-Yield Speculation

FAVCO presents a compelling high-yield, low-risk opportunity for income-focused investors willing to accept moderate growth uncertainty. Key positives:
- 5.1% dividend yield with a 39% payout ratio (earnings-backed).
- Undervalued metrics (P/E and P/B) suggest a margin of safety.
- Consistent DPS since 2023 signals dividend stability.

Risks aside, FAVCO's valuation offers asymmetric upside potential if earnings recover or the market re-rates its stock.

Conclusion

FAVCO Berhad is a dividend-focused income play with undervalued metrics, making it appealing for investors seeking steady payouts in a low-yield environment. While risks like weak cash flows and stagnant growth exist, the 5.1% yield and 7.6x P/E create an attractive entry point for those prioritizing income over growth. Monitor cash flow trends closely and consider a position size of 2–3% of a diversified portfolio to hedge against sector-specific risks.

Investors should consult the latest financial statements and perform due diligence before making investment decisions.