Journey to Wealth
Muhibbah Engineering - MARKET PERFORM - 27 June 2012
News Muhibbah Engineering ('Muhibbah') announced that its legal adviser had been informed by CIMB that it had withdrawn its support for APH's restructuring exercise.
Comments This news is a negative surprise to us as we expect the restructuring exercise, i.e. the debts to equity swap exercise, will somewhat mitigate the possible provisions for APH.
Based on Muhibbah's 2011 audited accounts, the receivables from APH stood at RM395m. However, the management is unable to guide on the the possible provision for APH at this juncture pending further clarification from its advisors.
We do not expect full provision for APH as the project is deemed viable. To recap, the project is already at 60% completion. A SPV will be set up to revive the project and more than RM1.0b is earmarked for the construction of the remaining packages.
Outlook This news will cast a negative sentiment on the counter due to the material amount of the receivables and the negative impact it will have on APH's financials and valuation should it require a full provision.
Nonetheless, we believe the company is still a 'goingconcern' company as it will still be supported y its ongoing projects, which is worth about RM2.2b (unbilled) and will last up to 3 years.
At present, Muhibbah's balance sheet remains healthy with a net gearing position of 0.25x. This will be enough to support its ongoing business.
Forecast We are maintaining our numbers at this juncture pending further development on this news. We are reverting back to our earlier assumption and imputing in a possible 30% provision for APH in our valuation. This reduces our Muhibbah's SoP valuation by 15%.
Rating Downgrade to MARKET PERFORM
Due to the uncertainties in the outcome of the APH issue, we are downgrading our recommendation to MARKET PERFORM from an OUTPERFORM. The next re-rating catalyst will be the revival of APH.
Valuation We have reduced our Target Price on Muhibbah to RM1.67 from RM1.97 as we revised down our SoP valuation lower by 15%. This is due to our assumption on a possible 30% provision/write-off on the RM395m receivables from APH.
Risks (1) Unable to revive the APH project. (2) Full provision which could lower its share capital by more than 25%, hence triggering one of the criteria of PN17 status.
Source: Kenanga
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