Period  2Q14/1H14

Actual vs. Expectations Muhibbah’s 1H14 net profit of RM41.1m came in within expectations, accounting for 47% and 41% of our forecast and consensus estimates, respectively.

Dividends  None as expected.

Key Results Highlights QoQ, 2Q14 revenue and net profit climbed 18% and 4%, respectively, mainly contributed by cranes and shipyard divisions. As for the cranes division, PBT more than doubled to RM36.2m thanks to the division’s orderbook hitting an all time high in 2Q14. As for shipyard division, PBT went up drastically by 174%, which we believe was contributed by substantial billings of the division on project reaching the tail-end of completion stage.

 YoY, despite 2Q14 revenue increasing by 18%, the group’s net profit was flat at RM20.9m (+1%) dragged down mainly by higher effective tax rate of 32% as compared to that of 15% recorded in 2Q13. Higher effective tax rate was due to nil tax loss set-off available for operational units among different countries.

 Overall, YTD, 1H14 was flat at RM41.1m (+1%), again due to higher tax expenses as mentioned above.

Outlook  As at May 2014, the group’s total current order book stands at RM1.9b, comprising: RM765m from construction, RM1.11b from crane and RM45m from the shipyard division, which will keep Muhibbah busy until 2016.

 While we see Muhibbah’s orderbook depleting soon (major orders to end this year), we understand that the group is actively pursuing new jobs domestically and overseas.

 Interestingly, the huge RM89b Petronas’ RAPID project has already kicked off with basic infrastructure jobs (i.e. site preparation works, power plant, access roads and off-loading facilities jetty) awarded to various contractors of late (since June 2014). We anticipate Petronas to continue to expedite the awards of other packages in the near-term given that the whole RAPID project was delayed previously. This should benefit Muhibbah as bulk of its estimated RM6.0b tenderbook are from RAPID-related projects. We believe there is a high likelihood that the group will win some of the packages in RAPID given the group’s excellent track record with Petronas (Malacca regassification terminal).

Change to Forecasts Unchanged.

Rating Maintain OUTPERFORM

 We continue to like Muhibbah due to: (i) its unique business structure that offers flexibility in infrastructure, marine engineering and O&G jobs, (ii) its ability to leverage on its internationally-recognized Favelle Favco’s name, and (iii) longterm earnings visibility backed by stable and growing recurring income from its concessions.

Valuation  We raised our SoP-based Target Price to RM3.55 (from RM3.30) after revising higher its construction division’s targeted PER to 14x (mid-sized construction stocks’ PER average) from 10x on higher conviction of Muhibbah securing Petronas jobs in the near-term. This is after seeing active awards from Petronas three months ago on RAPID’s Pengerang project. At RM3.55, the implied fwd-PER is 14.6x FY15 EPS, which is still within mid-cap sized construction peers’ historical PER range of 12-15x.

Risks to Our Call Failure of meeting our new contracts assumption.

 Delays in construction projects.

 Rising building material costs.

Source: Kenanga