News    Yesterday, Muhibbah’s 62%-owned subsidiary, Favelle Favco (Not Rated) announced it has secured crane supply orders worth RM161.1m from 5 different customers (i.e. Keppel Fels Ltd, China Merchants Heavy Industry (Shenzhen) Co Ltd, Marr Contracting Pty Ltd, Jiangsu ZhenJiang Shipyard (Group) Co. Ltd, PPL Shipyard Pte Ltd, and Rongsheng Offshore & Marine Pte Ltd). The cranes are expected to be delivered to the customers in mid to end of 2014. 

Comments    Although we are not entirely surprised with the news, we are certainly positive on the new orders as including these jobs, their crane division’s orderbook increased to c.RM806m from c.RM645m previously. Assuming net margin of 9%, these new orders could add another RM9.0m into Muhibbah’s bottomline next year, translating into2 sen/share of EPS.

YTD, Favelle Favco has secured RM315.8m of jobs and this was already accounted for 63% of our new contract assumption of RM500m for Muhibbah’s crane division. We do not discount any possibilities that Favelle Favco could secure more than we expected since it has already secured more than half of our new orders assumption in 1H13. 

Outlook   We estimate Muhibbah’s current order book stands at RM2.24b, comprising of (i) RM1.2b from construction, (ii) RM806m from the crane division and (iii) RM196m from the shipyard business. This will last them for the next two to three years.

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

 Forecast   No change in our earnings estimates as we have already imputed RM500m new contracts for the crane division. 

Rating   Maintain OUTPERFORM

We reiterate our OUTPERFORM rating on Muhibbah as we believe it is one of the construction stocks that could ride on both robust O&G and construction sectors outlook given its track record as marine and O&G and civil contractor.

Valuation    We maintain our Target Price of RM1.63 based on SoP valuation. 

Risks   Delays in construction projects.

Rising building material costs.

Source: Kenanga