Period     1Q13

Actual vs. Expectations   Muhibbah’s 1Q13 net profit of RM19.8m came in within our expectations, accounting for 26% and 24% of ours and the consensus estimates respectively.

Dividends    As expected, no dividend was declared in 1Q13

Key Results Highlights    QoQ, the 1Q13 bottom line returned to the black, registering a net profit of RM19.8m from a huge net loss of -RM150.7m previously. Recall that Muhibbah had then made a full provision for its remaining net exposure of debts due from Asia Petroleum Hub Sdn Bhd ("APH") amounting to RM245m in 4Q12. 

YoY,  the revenue declined by 23% but the net profit went up by 21%. The stronger bottom line performance was due to the higher margins across all its divisions except for the shipyard unit. It was  also due to a higher contribution from its concession division, especially with the increased airport passenger arrivals for its Cambodian operation.

Outlook    Its current order book stands at RM2.1b, comprising of RM1.2b from construction, RM645m from the crane division and RM196m from the shipyard business. This will last it for the next two to three years.

After making the full provision for its potential liabilities in APH in FY12, Muhibbah is resuming its business as usual. Moving forward, we believe Muhibbah will be one of the contractors that is set to ride on the robust construction and oil & gas outlook.

Change to Forecasts   No changes in our forecasts as the 1Q13 earnings were within expectations. 

Rating  Maintain OUTPERFORM

We are maintaining our OUTPERFORM rating on Muhibbah as we believe that it is one of the construction stocks that will ride on the robust outlook for the O&G and construction sectors given its track record as a marine, O&G and civil contractor. 

Valuation     We are revising higher our Target Price for Muhibbah to RM1.62 (from RM1.46) based on a SOP-based valuation. The revision is premised on: 1) rolling our valuation benchmark to FY14, 2) increasing its Construction earnings PER to 9x (in line with our target of 8x – 9x for the small cap contractors’ PER), and 3) factoring in the current market value of Favelle Favco into our SOP valuation. 

Risks    Delays in construction projects.

Rising building material costs. 

Source: Kenanga