Contract termination setback seen manageable for Muhibbah

This article first appeared in The Edge Financial Daily, on January 22, 2019.
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Muhibbah Engineering (M) Bhd
(Jan 18, RM2.80)
Downgrade to neutral with an unchanged target price (TP) of RM3.15:
According to a Bursa announcement, Muhibbah Viccana joint venture (JV) has received a notice from Bintulu Port Authority to terminate its port infra contract. The contract was awarded to the JV company in April 2017.

Muhibbah Engineering (M) Bhd has a 51% equity interest in Muhibbah Viccana JV. In April 2017, the JV company was awarded a contract to undertake the development of a supply base wharf and associated works in the second harbour basin at Bintulu Port in Sarawak. The contract value was estimated at RM584.8 million, with Muhibbah’s share of works carrying a value worth RM400 million. The job scope involved the construction of wharf, jetty and other associated facilities. Accordingly, it was scheduled to complete at the end of calendar year 2019.

Our rough estimate arrives to a progress work at around 45% to 50%. That leaves the contract’s current unbilled value at a range of RM200 million to RM220 million, or about 9.7% of Muhibbah’s RM2.1 billion outstanding order book.

Based on the current circumstances, we believe that the risk is concentrated on the near-term earnings projection. Furthermore, we note that the impact on earnings is muted for financial year 2020 onwards. Whilst the outcome has yet to be finalised, our assumption is pointing towards a manageable setback. In this regard, we opt to maintain our estimates at this juncture given the uncertainties of the final outcome. We believe this is apt as we make allowance for the ongoing negotiation and discussion with the Bintulu Port Authority.

Nonetheless, we feel that a downgrade to “neutral” is warranted. We believe the current TP of RM3.15 displays our conservative stance to mitigate the risk for a near-term adjustment. Assuming that a fair compensation for Muhibbah is agreed upon, we need to caution that reparation could take a while to materialise. Based on the current price, our TP implies a 7.5% upside to investors and an earnings yield of 6.7%. Moving forward, we believe any retracement in share price will unveil an attractive position for entry. — MIDF Research, Jan 18