With a robust order book and aplenty replenishment opportunities on the horizon, MNH is poised to achieve record-high earnings in FY23. We have revised our FY24 and FY25 forecasts upward by 32% and 66%, respectively. Our fair value for MNH now stands at RM0.59, up from the previous RM0.45, based on a 12x FY24f EPS of 4.9 sen. Given MNH's significant presence in the solar and data centre industries, the stock appears to be undervalued, especially with its forward P/E ratio of 8.8x.

Ended with a bang. To recap, MNH delivered an impressive performance in FY22, surpassing our expectations with core earnings of RM13.4m, at 127% of our full year projection. This achievement represents the company's best earnings since its listing. The positive earnings surprise was primarily due to stronger-than-expected results from both the underground and substation segments. The core PAT figure was arrived after adding back impairment losses on a financial asset amounting to RM4.0m. This impairment was incurred as a precautionary measure due to the project's 10% retention balance exceeding 1.5 years. It is worth noting that historically, the group has been successful in recovering the retention balance.

Buoyant order book with aplenty replenishment opportunities down the road. After securing a substantial win of >RM250m in FY23, MNH’s orderbook as of end June- 23 stood at buoyant level of RM327.8m, evenly split between the underground and substation segments. Considering that a significant portion of existing contracts are still in their initial stages and is set to gain momentum in FY23 (Figure#1), we reckon the group is set to post record-high earnings in FY23. For instance, the existing LSS projects valued at c.RM67.6m needs to be delivered by end of CY23, which will see strong recognition in 1HFY23 for the group. For uninitiated, underground contracts typically will be fully burn within 6-12 months while the substation segment takes 12-24 months. Despite the strong order book, MNH's tender book is robust, currently standing at c.RM330m. Within this RM330m, 48% is from the underground segment, with data centre related projects accounting for 62% of this portion. The remaining portion of the tender book for the substation segment mainly consists of Tenaga projects and solar farms.

Strong demand for underground and substation segments. Thus far into FY23, MNHOLDING has secured contracts worth approximately RM93.6m. Management has emphasized the continued strength in tender activities for both underground and substation projects, with demand stemming from utility companies and the private sector. Notably, the group has experienced robust demand for underground utilities in the northern region, driven by factors such as the influx of FDIs in the factory sector and the burgeoning solar segment. In the southern region, specifically Selangor and Johor, there is a significant uptick in underground demand attributed to the rapid growth of data centres and property development. It is important to highlight that data centres and solar farms typically demand for higher voltage underground cables or substations (such as 132kv or 275kv) due to the substantial power requirements of the former for server operations and the latter's need to step up voltage for grid system connectivity. Notably, the contract values for 132kv and 275kv underground or substation projects are considerably higher than those for 33kv projects. Given that these two sectors are still on the brink of a significant upswing in Malaysia, we anticipate a growing number of contracts emerging from these sectors in the near future.

Forecast. We revise our forecast upwards for FY24f and FY25f by 32% and 66%, respectively. Note that our forecast has yet to factor in the potential win from the MOU with Shanghai DC-Science Co Ltd, under which MNH will provide the necessary infrastructure such as power and water supply for the data centre project with a power load of 120MW. If this project materializes, we see an upside bias in our forecast. Meanwhile, we introduce our FY25f earnings forecast.

Fair Value of RM0.59. We value MNH at RM0.59 (from RM0.45), based on 12x FY24f EPS of 4.9sen. This P/E ratio represents a significant discount compared to solar EPCC contractors and construction players, whose forward P/E ratios are 16-20x and 15x, respectively. Considering MNH's strong presence in the solar and data centre industries, the stock appears to be undervalued, particularly with its forward P/E ratio of 8.8x.

Source: Hong Leong Investment Bank Research - 25 Oct 2023