#Hot Stock* Muhibbah's shares pull back after rising on news of RM100 mln contract award

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KUALA LUMPUR (Sept 03): The share price of Muhibbah Engineering (M) Bhd (MEB), which has won a RM100 million construction contract, came down on profit taking this morning, after rising in early trade.

The counter was down 6 sen or 1.94% at RM3.04, as at 12.25 pm. It had risen to as high as RM3.12 at 9.12am, but investors resorted to taking profit thereafter.  

Some 540,000 shares changed hands.

MEB told Bursa Malaysia yesterday, that it has bagged a RM100 million contract from BASF Petronas Chemicals Sdn Bhd to build a new aroma chemical complex and relevant facilities for the Lemongrass Project, located in Kuantan, Pahang.

"The job will commence immediately and will be completed in two years. The contract is expected to contribute positively to the earnings and net assets of Muhibbah group, for the current and future financial years,” said the company.

In a note to clients today, Alliance DBS Research Sdn Bhd said that MEB needs to secure more jobs to provide a comfortable degree of earnings visibility.

"We are cautious on Muhibbah’s thinning orderbook balance," said Alliance DBS analyst Jeremy Goh, adding that at a cover of only 0.9 times financial year revenue, more sizable job wins are needed to provide a comfortable degree of earnings visibility for the group.

"With the recent (RM100 million) job at hand, we estimate year-to-date orderbook replenishment for its construction division to stand at RM221 million. This would translate to an overall orderbook balance (including cranes and shipyard) of RM1.8 billion," he said.

Goh noted there were several potential job wins in the pipeline, including contracts from RAPID, where MEB has tendered RM3 billion to RM4 billion via subcontracts to the main engineering, procurement, construction, and commissioning (EPCC) contractors.

"However, we caution that securing these contracts hinges on the main EPCC contractors that MEB has partnered with, to win the jobs to begin with," he said.

Nevertheless, Alliance DBS is maintaining its "hold" call on the stock, with an unchanged target price of RM3.20, based on 15 times of financial year 2015 earnings.

The research house projected MEB's revenue for FY14 and FY15 at RM1.52 billion and RM1.56 billion, and net profit at RM75 million and RM89 million respectively.

Meanwhile, Kenanga IB Research retained its "outperform" rating on MEB, as the contract value is within its FY14 new jobs assumptions.

"We are maintaining our sum of parts (SOP) derived target price of RM3.55. This implies forward price to earnings ratio (PER) of 14.6 times FY15 earnings per share (EPS), which is still within mid-cap sized construction peers’ historical PER range of 12-15 times," said Kenanga analyst Iqbal Zainal.

"We continue to like Muhibbah, due to its unique business structure that offers flexibility in infrastructure, marine engineering and O&G jobs, its ability to leverage on its internationally-recognized Favelle Favco’s brand name, and long-term earnings visibility, backed by stable and growing recurring income from its concessions," he said.

"We are positive on Muhibbah’s job flows. This is the fourth O&G related contract secured by the group, so far this year. Including this contract, Muhibbah’s YTD job wins amounted to RM221 million or 32% of our RM700 million new jobs assumption for FY14.

"We believe the remaining (about RM400 to RM500 million) new orders will be secured by the group before end of FY14, and are likely from Petronas and RAPID project," he added.

He said Muhibbah's current order book stands at RM1.91 billion, comprising RM865 million from construction division, RM1.11 billion from crane and RM45 million from the shipyard division, which will keep Muhibbah busy until 2016.