This article first appeared in The Edge Financial Daily on February 17, 2020
Muhibbah Engineering (M) Bhd
(Feb 14, RM1.84)
Maintain outperform with a lower target price (TP) of RM2.35 per share: Muhibbah’s share price plunged from RM2.31 on Jan 21 to as low as RM1.59 on Feb 4 before settling at RM1.96 last Thursday, a loss of 15% or RM169 million in market capitalisation. In essence, the stock was facing intense selling pressure following news of the construction of new airports in Cambodia (which would then impact its existing airports) and the fast spreading Covid-19 (which has affected travelling).
Recent media reports have mentioned that construction works of new airports in Phnom Penh and Siem Reap are proceeding. According to the news, the new airports are targeted to be completed in mid-2022 (in Phnom Penh) and 2022/23 (in Siem Reap). This could then directly impact Muhibbah’s existing airports.
The jury is still out whether the new airports will take shape according to plan due to certain reasons.
In the scenario where both the new airports come on stream, Muhibbah’s existing airports in Phnom Penh (which has an exclusive clause in the concession agreement) and Siem Reap (non-exclusive) may either be asked to close down or continue their operations. Either way, this will inevitably cause earnings to be significantly impacted. Muhibbah, via Societe Concessionaire de l’Aeroport (SCA), has exposure to three airports in Cambodia, which are captured in the concessions division. This segment contributed a pre-tax profit (before group eliminations and minority interest) of RM142.6 million (or 59%) to Muhibbah for its nine months of financial year 2019 (9MFY19). Nonetheless, in such an event, SCA could seek compensation (for an undisclosed amount) from the government on account of its exclusive rights. We gather under the agreement, any legal disputes will be settled via arbitrations in the court of Switzerland.
Meanwhile, we are not overly concerned about an adverse lasting impact from less travelling due to the Covid-19 scare. Most likely, passenger traffic at its airports (which plunged as much as 40% recently due to the slump in Chinese travellers who typically made up slightly more than a third of tourist arrivals) is expected to recover eventually when the outbreak is contained in the coming months.
We have: i) adjusted our core net profit down 7% for FY19 and up 12.6% for FY20; and ii) lowered our sum-of-the-parts valuation-derived TP from RM2.90 to RM2.35, as we tweak our profit contributions/valuation for its Cambodia airport concessions. To put things in perspective, our implied price-earnings ratio (PER) valuation of 11 times for the airport concession business (given its smaller size) appears reasonable relative to calendar year 2020 PER of 17 times for Malaysia Airports Holdings Bhd and 36 times for Airport of Thailand based on consensus earnings. — Kenanga Research, Feb 14