Overreaction to weak Q4 results

• FARA’s share price went down 14% since the delivery of weak Q4 results last month. However, the figures were not surprising to us, as they were in line with the profit warning issued in December (due to the delays in some projects). At that time the company guided EBITDA of around NOK -23m, while the actual figure came out at NOK -22,8m.
• On the other hand, revenues and operating costs were above our expectations. The quarter was marked by high external consultancy costs related to the merging of different Fara platforms. We increased our operating cost estimates following the report. Nevertheless, we continue to expect significant margin improvement in H2 2010, as the consolidation of platforms is nearing the completion.
• In the outlook section, the management stated that the company participates in several tenders and more should come in 2010. Thus, we can expect near term positive news flow.
• The company had used NOK 9,6m out of NOK 40m of credit facilities available by the end of Q4. We find that current liquidity reserves are satisfactory for daily operations.
• Our DCF-based target price is down from NOK 1,40 to NOK 1,00 on the back of downward estimate revisions. However, we believe that the market overreacted to the weak Q4 results sending the share too low. Hence, we reiterate our Buy recommendation.

Conclusion
We believe that the market overreacted to the weak Q4 results sending the share too low. Thus, we reiterate our Buy recommendation with a target price of NOK 1,00 per share.

Download the full report here:
FARA_Terra_MarketReport_2010-03-19