Muhibbah Engineering (M) - Termination of Works at Bintulu Port

Date: 18/01/2019

Source  :  KENANGA
Stock  :  MUHIBAH       Price Target  :  3.20      |      Price Call  :  BUY
        Last Price  :  2.58      |      Upside/Downside  :  +0.62 (24.03%)

MUHIBAH has received a termination letter from Bintulu Port Authority (BPA) on its on-going works for the construction of wharf, jetty and other associated facilities in Bintulu Port. We were negatively surprised but maintain our FY18-19E earnings as the potential impact is less than 5% to our FY19E earnings while also anticipating MUHIBAH getting a fair compensation. Maintain OUTPERFORM, unchanged SoP-driven Target Price of RM3.20.

News. Yesterday, MUHIBAH received a termination letter from BPAon its on-going works for the construction of wharf, jetty and other associated facilities in Bintulu Port. To recap, MUHIBAH along with its joint-venture partner Viccana (51:49) bagged the contract of RM584.8m back in April 2017 with a construction timeline of approximately 30 months.

Negatively surprised. We were negatively surprised with the unexpected termination, as we did not expect BPA to discontinue the construction works of its supply base wharf. We believe the unexpected termination could be due to BPA’s decision on putting on hold its expansion plans. Positively, management is currently in negotiation with BPA and is confident that they will be compensated fairly for the termination of the project. Based on our assumptions, we expect the current progress of the construction works to be c.50% or more and its outstanding order-book to come down from c.RM2.0b to c.RM1.8b after the termination.

Outlook. MUHIBAH’s outstanding order-book currently stands at c.RM1.8b (construction: c.RM1.3b, cranes: RM0.5b) providing at least two years of visibility. As for its associate, i.e. Cambodian 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 MRT2 and LRT3, we expect some review in cost but would be insignificant to MUHIBAH as its exposure only makes up 10% of its outstanding order-book.

Earnings estimates. We are keeping our FY18-19E earnings for now despite the termination, as we anticipate compensation from BPA to offset the loss of income, which is less than 5% of our FY19E earnings.

Maintain OUTPERFORM. Following the termination, we expect some knee-jerk selling of its shares. Nonetheless, this could present a compelling entry level as we expect minimal impact from the termination. We reiterate our OUTPERFORM call with an unchanged SoP-driven Target Price of RM3.20, which implies 9.1x FY19E PER.

Furthermore, our valuation is reasonable when stacked against players like Malaysia Airports Holdings (AIRPORT) that is traded at >20x. To recap, its associate contribution of which the bulk is from its Cambodia airport made up c.60% of its 9M18 pre-tax profit, is the major earnings driver for MUHIBAH.

Risks include: (i) failure to meet the order-book replenishment target, (ii) delays in construction progress, (iii) sharp spike in raw material costs, and (iv) sharp drop in passenger traffic.

Source: Kenanga Research - 18 Jan 2019

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