This article first appeared in The Edge Financial Daily, on April 15, 2016.

Muhibbah Engineering (M) Bhd
(April 14, RM2.40)
Maintain outperform with target price (TP) of RM2.79: Muhibbah Engineering (Muhibbah) and its joint-venture partner Vinci Construction Grands Project (VCGP) were awarded a contract worth US$23 million (RM89.47 million) to design and construct a new domestic terminal for the Phnom Penh International Airport in Cambodia. The construction works for the airport will commence immediately, and is expected to be completed by the fourth quarter of 2017. 

While the effective contract sum of RM26.4 million is deemed to be smallish for Muhibbah, we are positive on the contract award as the job indicates that there will be more growth potential for its investment in Cambodian Airports, which charted 13% growth in passenger movements last year and contributed some 30% to its bottom line.

Assuming a pre-tax margin of 12%, this particular contract is expected to contribute RM2.5 million to our estimated financial year ending Dec 31, 2016 (FY16E) and FY17E net profit of RM92.9 million and RM104.9 million, respectively.

As of February 16, Muhibbah’s outstanding order book stood at RM2.5 billion, easily providing the group at least two years of visibility. 

Meanwhile, it will continue to focus on the refinery and petrochemical integrated development (Rapid) project while bidding for mass rapid transit 2 and other infrastructure jobs. 

We reiterate our “outperform” call on Muhibbah with an unchanged TP of RM2.79. Our sum-of-parts-based TP of RM2.79 implies FY16E price-earnings ratio of 14.1 times, which is at a slight premium compared to our target small-mid cap construction peers’ range of nine times to 13 times. 

We like Muhibbah for its diversified earnings profile, especially its Cambodian Airports concession coupled with its strong presence in Rapid. — Kenanga Research, April 14