Muhibbah Engineering (M) Bhd
(Aug 20, RM1.82)
Maintain buy with a lower target price (TP) of RM2.59: Muhibbah Engineering (M) Bhd is positioning itself as an integrated oil and gas engineering procurement, contracting and commissioning (EPCC) infrastructure specialist.

Muhibbah executive director and group finance director provided insights into its competitive advantage on the back of grim conditions of falling currencies and crude oil prices. We reiterate our “buy” recommendation but with a revised TP of RM2.59.

We visited Muhibbah’s headquarters in Klang. The key takeaways from the visit are as follows: Muhibbah is turning more of its focus on oil and gas construction, and it is upping its ante in the oil and gas downstream greenfield EPCC business.

The concentration of EPCC-related jobs in Muhibbah’s tender book has amounted to RM2 billion year-to-date, with a bid of RM1 billion for the refinery and petrochemical integrated development (Rapid) in Pengerang, Johor.

Hence, we are expecting higher order book replenishment for financial year ending Dec 31, 2015 (FY15) due to Muhibbah’s tender book success rate of between 20% and 30%.

The potential increase in its order book replenishment may prospectively stem from its partnership in Rapid, with either Toyo Engineering Corp, Técnicas Reunidas SA, Sinopec Engineering (Group) Co Ltd, CTCI Corp Consortium or Petrofac International (UAE) LLC.

Muhibbah is expected to participate as a main contractor in Rapid via a technical partnership. This would help to extend its capabilities beyond installation, fabricating and constructing, to include commissioning.

The order book replenishment is expected to increase contribution by its construction segment from 11% of revenue in FY14 to 20% in FY15 and 30% in FY16.

This will cascade down into potentially higher overall earnings in FY15 and FY16.

We reiterate our “buy” stance with a revised TP of RM2.59, implying a FY16 price-earnings ratio of 12 times. The assigned multiple equates to the lower end of our mid-cap construction range of 12 to 14 times.

It reflects our cautiousness due to the bearish market sentiment, and recent plunge in crude oil prices — MIDF Research, Aug 20

This article first appeared in digitaledge Daily, on August 21, 2015.