This article first appeared in The Edge Financial Daily on January 28, 2019

Muhibbah Engineering (M) Bhd
(Jan 25, RM3)
Maintain outperform with an unchanged target price (TP) of RM3.20: Last Thursday, Muhibbah Engineering (M) Bhd received two contract awards cumulatively worth RM165.0 million from Turnpike Synergy Sdn Bhd (wholly-owned subsidiary of Projek Lintasan Kota Holdings Sdn Bhd) for the construction of noise barriers on the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) and Damansara-Shah Alam Elevated Expressway (DASH) highways. Based on our understanding, the construction of noise barriers is for the entire alignment of SUKE and DASH highways. Construction works would commence by the end of January 2019 and are expected to complete by the first quarter of 2021.

This marks its first contract win for the year, and we are “neutral” as the contract value of RM165.0 million is in line with our order book replenishment assumptions of RM550 million for financial year 2019 (FY19). Assuming a conservative pre-tax margin of 10%, the noise barrier contracts would contribute about RM5.7 million to its bottom line per annum.

The contract award bring Muhibbah’s outstanding order book to about RM2 billion (construction: about RM1.5 billion, cranes: RM500 million) providing at least two years of visibility. As for its associate, that is Cambodia airports, we believe traffic growth will remain robust at high teens and it remains one of its major earnings contributors. Going forward, we expect they would be able to maintain traffic growth momentum, driven by traffic from China. As for mass rapid transit Line 2 and light rail transit Line 3, we expect some review in costs but it would be insignificant to Muhibbah as its exposure to them is only at 10% of its outstanding order book.

No change to our FY18-FY19E (estimate) earnings as the contracts award is within our order book replenishment target.

We reiterate outperform call with an unchanged sum-of-parts-driven TP of RM3.20, which implies a 9.1 times FY19E price-earnings ratio (-0.5 standard deviation of its four-year average levels) as we believe that Muhibbah has minimal risks in the local construction scene compared to other contractors. Furthermore, our valuation is reasonable when stacked against players like Malaysia Airports Holdings Bhd that is traded at greater than 20 times. To recap, its associate contribution of which the bulk is from its Cambodia airports made up about 60% of its nine months of FY18 pre-tax profit is the major earnings driver of Muhibbah.

Risks include failure to meet the order book replenishment target, delays in construction progress, sharp spike in raw material costs and sharp drop in passenger traffic. — Kenanga Research, Jan 25