This article first appeared in The Edge Financial Daily, on December 3, 2015.
Muhibbah Engineering (M) Bhd
(Dec 2, RM2.28)
Maintain outperform with a higher target price (TP) of RM2.79: On Tuesday, Muhibbah Engineering announced that it was awarded an engineering, procurement, construction and commissioning (EPCC) job in the refinery and petrochemical integrated development (Rapid) by Petroliam Nasional Bhd (Petronas) amounting to RM300 million. The EPCC job will take up to 12 months and is expected to be completed by end-2016.
Muhibbah is fast securing contracts as it secured an EPCC job (about RM93 million) last Friday, and another contract from Petronas amounting to RM300 million.
This contract is Muhibbah’s fourth Rapid job secured, bringing its year to date contracts secured up to RM1.2 billion, which exceeds our FY15E (estimate) order book replenishment assumptions of RM800 million by 51%.
Assuming a conservative pre-tax margin of 7%, this contract would easily contribute RM15.8 million to its FY16E bottom line.
This contract award will bring its current outstanding order book up from RM2.5 billion to RM2.8 billion, easily providing the group at least two years of visibility. The consecutive job wins from Rapid leads us to believe that the group will continue to focus on bidding for more Rapid projects in 2016.
Following the contract award, we raised our FY16E net profits by 4% to RM92.9 million, as we raised our FY16 order book replenishment assumptions by another RM800 million to RM1.6 billion with RM1.2 billion remaining, after factoring in the previous two contract awards. However, do note that our billings recognitions are rather conservative as most of the recognition is backloaded.
We reiterate our “outperform” call on Muhhibah with a higher TP of RM2.79, post revision in our FY16E earnings for its construction division. Our sum-of-parts-based TP of RM2.79 implies FY16E price- earnings ratio of 12.4 times, which is in line with our target small and mid-cap construction peers’ range of nine times to 14 times. Muhibbah remains our preferred pick given its strong presence in Rapid. — Kenanga Research, Dec 2