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This article first appeared in The Edge Financial Daily on December 4, 2017

Muhibbah Engineering (M) Bhd
(Nov 30, RM2.80)
Upgrade to outperform rating with a higher target price (TP) of RM3.55 per share:
Muhibbah Engineering (M) Bhd’s nine months of financial year 2017 (9MFY17) core net profit (CNP) of RM83.8 million came in above our expectations (due to better-than-expected associate contribution) but within consensus expectations, accounting for 83% and 70% of full-year estimates respectively. No dividends were declared as expected. 

9MFY17 CNP registered a decent growth of 35% y-o-y despite weaker revenue, which declined by 15%. This was due to a strong improvement in associate contribution (+111%), mainly driven by strong passenger traffic growth in Cambodia (+26%), lower effective interest cost (-31%) due to lower net gearing, which came off to 0.3 times from 0.9 times, and a lower effective tax rate of 10% (-1 percentage point). Quarter-on-quarter, its third quarter of FY17 (3QFY17) CNP came off by 15% due to a decline in associate contribution (-56%) and higher minority interest contribution (+25%). 

Muhibbah’s outstanding order book currently stands at RM1.9 billion (construction: RM1.4 billion; cranes: RM500 million) providing at least two years of visibility. As for its associate Cambodia Airports, traffic growth remained robust at 26% y-o-y as of 9MFY17, and we believe they are able to maintain the growth momentum into 4QFY17. 

Post results, we upgrade our FY17/18E CNP by 26%/28% after we factored in a higher associate contribution as we had revised our passenger traffic estimates higher by another 15%. 

In light of its strong performance driven by its Cambodian Airport associate, we are upgrading it to “outperform”, with a higher sum-of-parts-driven TP of RM3.55 (previously “market perform”; TP: RM2.94) following an upgrade in earnings estimates for its Cambodian concession. Our TP of RM3.55 implies 12.5 times FY18 estimated price-earnings ratio, which is in line with our small- and mid-cap peers’ range of nine times to 13 times. However, we believe the premium is justified due to the strong contribution from its concession assets.

Risks include failure to meet its order book replenishment target, delays in construction progress and a sharp spike in raw material costs. — Kenanga Research, Nov 30
 

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