• Reiterate Add. FY24-FY25F EPS raised, with a higher TP of RM1.34

• Earnings delivery improving, particularly for cranes and construction units

• Cambodia airport showing encouraging recovery signs but investors continue to assign zero value for it

Reiterate Add; TP raised to RM1.34.

We reiterate our Add rating and lift our SOP-derived TP to RM1.34 to reflect a higher value for Favelle Favco, construction segment, and cash of US$63m for Siem Reap Airport compensation (Fig 3). We continue to like Muhibbah as a proxy for a recovery in tourist arrivals in Cambodia with its Cambodian airport concessions while its marine expertise and Petronas fabrication licence also enable it to clinch more Petronas jobs. Key downside risks are patchy execution track record for construction jobs which may lead to earnings disappointment and higher raw material costs. Re-rating catalysts include better earnings delivery and stronger tourist arrivals in Cambodia.

Earnings delivery improving; 4Q23 core net profit a beat

Its earnings delivery has been a key concern but this appears to be improving, judging by its 4Q23 core net profit of RM45m (>100% qoq) although its headline net profit included a string of one-offs (Fig 1). Earnings delivery will be anchored by a stronger orderbook of RM2.2bn at Feb 2024 which is higher than Aug 2019’s RM1.7bn (Fig 7). More importantly the quality of its orderbook is also improving with more Petronas projects. In Jan 2024, its crane business clinched two new projects worth RM79m, bringing its crane orderbook to RM843m as at Feb 2024. The hidden gem in its crane business is Exact Automation (an industrial automation company acquired in 2018 with a niche in oil & gas and renewable energy). Given the global nature of its business, Muhibbah alluded to possible tenders for the Saudi Line City project for a linear smart city under construction in Saudi Arabia in Neom, Tabuk Province, which is designed to have no cars, streets or carbon emissions.

Cambodia airport quandary; optimistic of a favourable outcome

Muhibbah owns a 21% effective stake in Cambodia Airports, which manages two operating airports in Cambodia (in Phnom Penh and Sihanoukville). It surrendered its Siem Reap airport concession in Oct 2023 and was paid US$63m in compensation. Similar to what happened in Siam Reap, the new international airport in Phnom Penh known as Techo International Airport in Kandal (currently in construction and slated to start operations in 1H25 according to State Secretariat of Civil Aviation, SSCA) will replace the current Phnom Penh Airport. The most ideal scenario for Muhibbah is to receive compensation for the loss of its existing operations of Phnom Penh airport and be engaged to operate the new airport at Kandal. We do not discount this possibility as the new airport is being built by a JV between Secretariat of State for Civil Aviation and the Overseas Cambodia Investment Corporation (OCIC) owned by a local businessman, both of who do not have the expertise to run an airport. In 2023, the three airports in Cambodia clocked 4.8m passenger arrivals, a 102% yoy jump. 4Q23 passenger arrivals increased 16% yoy to 1.1m. As a comparison, passenger arrivals in 2019 were 11.6m.

Source: CGS-CIMB Research - 27 Feb 2024