This article first appeared in The Edge Financial Daily on March 19, 2020

Muhibbah Engineering (M) Bhd
(March 18, 87.5 sen)
Upgrade to buy with a lower target price of RM1.01: Medium-term prospects remain subdued due to the Covid-19 pandemic and airport concession uncertainties. Earnings for the immediate term stay visible, backed by orders worth RM1.5 billion. At the current share price, the opportunity to pick up the stock appears fairly attractive at 0.4 times forecasted financial year ending Dec 31, 2020 (FY20F) price-to-book value, below -4 standard deviation of its historical five-year mean.

Covid-19 fears and travel restrictions would continue to limit traffic at Muhibbah Engineering (M) Bhd's airports, with inbound numbers already dropped to a great degree. Earnings expectations would turn dismal as traffic from China accounts for 30% to 40% of total passengers.

Another threat is from the oil market, with prices already taken a deep dive. In theory, a price correction would usually see air travel demand rising on cheaper tickets. Now, it appears unlikely due to the pandemic. To reflect this, we have imputed an about 20% drop in passenger traffic for FY20F.

Prospects could turn sour for Muhibbah’s 59% subsidiary Favelle Favco Bhd, given its exposure to the oil and gas (O&G) industry. Current orders amount to RM582 million (up from RM564 million as at November), coming from the global O&G shipyard, construction and wind turbine industries.

Offshore O&G exploration and production activities still form the largest share of the order book at 62%. In our view, current orders and existing rental income should be able to sustain earnings by more than a year, but the potential for lucrative new jobs appears scarce for now.

Our forecasts have changed largely due to weak expectations for the performance of airports in Cambodia in the first half of 2020. The recent drop in oil prices is unlikely to affect existing orders for the crane division, but replenishment efforts could be challenging. A recovery in oil prices would likely improve the prospects for future crane jobs.

Risks to our call include a longer-than-expected slowdown in passenger traffic, unfavourable compensation for airports and failure to secure any new jobs for the crane segment. — RHB Research Institute, March 18