Investment Merits

• Proxy to the recovery in tourism in Cambodia, and the potentially positive outcome of the Phnom Penh airport concession
• Solid earnings from Favelle Favco (Favco), led by robust crane demand and the bright outlook for its intelligent automation arm
• A potential revival of OSV newbuild orders, riding on OSV replacement cycle

Company Profile

Muhibbah Engineering (M) (Muhibbah), established in 1972, is a niche global specialist contractor with multiple business segments – infrastructure construction, crane & manufacturing, and concessions. The infrastructure construction division executes projects across various industries including marine, building, infrastructure, O&G, and manufacturing. Muhibbah also owns a 64.5% stake in Favco, which specialises in crane manufacturing and design, as well as offers engineering and maintenance services for automation solutions. Muhibbah also owns a 21% effective stake in two Cambodian airports and a road maintenance concession in Malaysia.

Highlights

Proxy to Cambodia’s tourism recovery. Its 21% stake in the Cambodian airports should enable Muhibbah to continue benefitting from the country’s tourism recovery. It was reported that Cambodia attracted 5.4m foreign tourists in 2023 (+139% YoY), and is expected to see a further recovery in visitor arrivals in the next few years. Cambodia’s Ministry of Tourism has estimated that the number of international visitors will reach 7m by 2025 (2019: 6.6m visitors). The gradual return of China visitors remains a major catalyst, despite the country’s poor reputation related to online scams and human trafficking. The three Cambodian airports (Muhibbah previously had stakes in three airports before giving up one airport last year) recorded total passengers of 4.8m in FY23 (+102%) – of these, China visitor arrivals increased by sevenfold YoY to 0.8m following the reopening of China’s borders in early 2023. Note that a total of 11.6m passengers used these airports back in 2019 (pre-COVID-19), with China visitors accounting for about 39% (4.5m passengers).

Potential positive outcome from Phnom Penh airport concession? We note that Muhibbah’s associate Cambodia Airports (SCA) was paid a compensation of USD64m by the Cambodian government for the closure of operations at the old Siem Reap International Airport in 2023. There have been concerns on the sustainability of the existing Phnom Penh International Airport (PPH), after Overseas Cambodia Investment Corp started building the country’s largest new airport in Phnom Penh – Techno International Airport (KTI). Phase 1 of the airport will be able to handle 13m passengers, and is expected to commence operations in 2025. It was reported that KTI will replace PPH, which is currently under a concessional agreement until 2040. Negotiations are ongoing, and a favourable result based on the Cambodian government’s win-win policy is expected in the near future. We do not discount the possibility of PPH receiving a compensation, and being involved in KTI’s operations.

Earnings anchored by Favco. Favco’s orderbook stood at MYR843m as of Feb 2024 (+47% YoY), largely contributed by offshore cranes (41%) and tower cranes & others (43%). Favco is optimistic on its prospects, backed by improved spending in the O&G segment due to stable oil prices. The demand for cranes remains high, with shipyards seeing increased orderbooks and undergoing upgrades in yard facilities. Its intelligent automation division’s outlook is also bright, after seeing record-high revenue and earnings in FY23.

Better infrastructure construction job prospects. The outstanding segmental orderbook of MYR1.4bn will continue to provide earnings visibility over the next two years. While Muhibbah is still actively tendering for various projects, management guided that there are increased queries for OSV newbuilds due to robust upstream activities and ageing vessels. As such, Muhibbah stands a chance to benefit from a potential revival in shipbuilding within the OSV space.

Company Report Card

Results review. Stripping off multiple provisions and impairments, FY23 core earnings increased by 5.4x YoY to MR53m on the back of stronger associate contributions – predominantly from its airports business in Cambodia, and from Favco.

Management. Muhibbah is helmed by co-founder and group managing director Mac Ngan Boon and Executive Director/Deputy CEO Mac Chung Jin.

Investment Case

Premised on Cambodia’s tourism recovery, we see an earnings recovery from Muhibbah’s associate contributions. We also continue to see solid earnings growth from its crane and intelligent automation arm. A potential revival of OSV newbuild orders could provide earnings upside in the medium term, as the industry faces a replacement cycle amidst a trend of ageing vessels.

Our FV range of MYR1.14-1.42 implies 12-14x FY25 P/E. Such valuations are at +1 to +1.5 SD from its 5-year mean of 9.7x. In terms of P/BV, the stock is currently trading at its 5-year mean of 0.4x, and our FV implies P/BV of 0.6-0.7x, which is at around +1SD.

Key risks: Weaker-than-expected work orders from clients, cancellation of airport concessions without compensation, and higher-than-expected operating costs.

Source: RHB Securities Research - 15 May 2024