News  Yesterday, Muhibbah announced that it has secured an O&G contract for the Construction, Fabrication and Installation of the new Aroma Chemical Complex and the Relevant Plants/ Facilities for Lemongrass Project located in Kuantan, Malaysia from BASF PETRONAS Chemicals Sdn Bhd. The contract value is approximately RM100m.

 The project will commence immediately and is estimated to be completed in two years time.

 Job scope includes the construction work for all commodities, i.e. civil, structural steel erection, architectural and sheeting, piping, mechanical, insulation, painting, electrical, instrumentation, scaffolding, warehousing, heavy lift, HVAC and pre-commissioning.

Comments  We are positive on Muhibbah’s job flows. This is the fourth O&G-related contract secured by the group so far this year. Including this contract, Muhibbah’s YTD job wins amounted to RM221m or 32% of our RM700m new jobs assumption for FY14. We believe the remaining (about RM400-RM500m) new orders will be secured by the group before end-FY14 and are likely from Petronas also i.e. RAPID project.

 Assuming PBT margin of 7%, this project will contribute about RM2.6m into Muhibbah’s bottomline per annum until FY16.

Outlook  Including this contract, we estimated that Muhibbah’s total current order book stands at RM1.91b, comprising: RM865m 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 (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 expediting 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).

Forecast  Maintained as the contract value is well within our FY14 new jobs assumptions.

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 brand name, and (iii) long-term earnings visibility backed by stable and growing recurring income from its concessions.

Valuation  Maintain our SoP-based Target Price of RM3.55. This implies fwd-PER of 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