Muhibbah likely to expand into new airport concessions regionally

This article first appeared in The Edge Financial Daily, on January 15, 2019.
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Muhibbah Engineering (M) Bhd
(Jan 14, RM3.01)
Maintain add with an unchanged target price (TP) of RM3.76:
During a small group meeting at our Malaysia Corporate Day, Muhibbah Engineering (M) Bhd reiterated its positive outlook for its business in 2019, viewing its overseas exposure as unique compared with those of other diversified contractors. We view Muhibbah’s growth strategies positively and expect its overseas exposure to overshadow risks in the outlook from its domestic contract. We also believe success rates for overseas tenders are good given its 10-year track record in Qatar.


Muhibbah reiterated the potential of its 21% associate stake in three Cambodian international airports to become a significant contributor to the group’s earnings, mitigating its other divisions’ volatility. More than 90% of associate earnings came from the Cambodian airports, while the road maintenance division made up the balance as at the cumulative nine months of financial year 2018 (9MFY18). As at 9MFY18, associates made up 62% of total pre-tax profit, up from 51% in 9MFY17. The concession tenure until 2040 generates its full-fledged airport-type revenue in US dollar. The group still plans to expand into new airport concessions regionally.


Its total outstanding order book for construction and cranes stood at RM2.1 billion as at end-2018, of which construction or infra made up most of the value. Its total value of jobs in tender of RM4.3 billion is mostly private sector-based clients, domestic and overseas. Also, we think more potential contract wins could emerge from Petroliam Nasional Bhd’s (Petronas) overseas ventures and other infrastructure jobs in Qatar. At end-2018, Muhibbah secured a combined RM205 million of contracts from Petronas for projects in Melaka and Myanmar.


Our FY18 to FY20 forecast earnings per share (EPS) is maintained at a three-year EPS compound annual growth rate of 14.8%, 9MFY18 net cash of 12% of its market capitalisation, and return on equities of 14% to 15%. Our TP of RM3.76 remains pegged to a 20% discount to revalued net asset value. We maintained our “add” call as we believe potential catalysts could arise from likely project wins domestically in the non-rail segment, and investors’ increased preference for stable recurring income-based contractors with an exposure to foreign job markets. Downside risks are weaker earnings and slower job wins. — CGSCIMB Research, Jan 13