Muhibbah Engineering Bhd
(Nov 18, RM2.25)
Upgrade to buy with a raised target price (TP) of RM3.50: The excessive selldown of the stock was likely due to the perception it did not win the regasification plant contract in the refinery and petrochemical integrated development (Rapid) project. But it did not bid for this contract. Hence, we upgrade the stock to “buy” with a higher TP of RM3.50 based on unchanged 15 times price-earnings ratio (PER) (sector average). The stock is trading at 10 times financial year 2015 forecast (FY15F) PER on the back of two-year earnings compound annual growth rate of 15%. Supported by a RM6 billion tender book, there is room for contract wins (excluding Rapid) to surprise on the upside. We raised FY14F/FY15F/FY16F earnings by 8%/8%/14% after factoring in stronger contract wins of RM600 million for FY14F (vs RM150 million) as we expect a sizeable contract from Rapid by year-end/early 2015. Our job win assumptions for FY15 to FY16F remain at RM1 billion per annum.

With its Petroliam Nasional Bhd licence and marine-based expertise, Muhibbah is poised to clinch a sizeable share of contracts at Rapid. Out of the five Rapid packages, Muhibbah appears to be the strongest contender for civil and fabrication works for Package 3 which was awarded to Technicas Reunidas SA to build a refinery and steam cracker plant. Muhibbah is also in the running for three other packages as it had worked before with some of the foreign engineering, procurement, construction and commissioning contractors. Assuming a RM500 million win (RM300 million base case, RM1 billion bull case), this would lift the current infrastructure order book to RM1.4 billion (1.4 times FY13 infrastructure revenue). This does not yet include the deepwater jetty worth RM1 billion. — AllianceDBS Research, Nov 18

This article first appeared in The Edge Financial Daily, on November 19, 2014.