News  Muhibbah announced last week that it has secured contracts from Jasa Merin (M) Sdn Bhd, a 70% owned subsidiary of Silk Holdings (NOT RATED), for two units of Anchor Handling Tug Supply Vessels (AHTSV) with a value of approximately RM219m.

 The vessels are scheduled to be delivered by end of 2Q15.

Comments  We are POSITIVE on the announcement as: (i) the new order is timely given that its current shipyard orderbook are now depleting and (ii) the order value is 10% above our FY14 new vessels order assumption of RM200m.

 Small value but big contribution to bottomline. Earnings-wise, assuming 24% PBT margins (based on 3-year average), the contracts could contribute a total of RM39.4m net profit (9.6 sen EPS) until end-2Q15. This already makes up 38% our estimated FY15E net profit.

Outlook  Sizeable orderbook provides two years’ earnings visibility. Including this new order, we estimate Muhibbah’s total outstanding order book to increase to RM2.15b, comprising RM875m from construction, RM1.02b from crane and RM257m from the shipyard division. This will keep Muhibbah busy until 2016.

 To benefit from RAPID. We also like the fact that the huge Petronas’ RAPID project (worth RM89b) has already kicked off with basic infrastructure jobs (i.e. site preparation works, power plant, access roads and offloading facilities jetty) already awarded to various contractors (since June 2014). Given that the bulk of Muhibbah’s tenderbook is from RAPID-related projects, we reaffirm our view that Muhibbah will likely benefit from the recent slew of contracts in RAPID. Note that Muhibbah also has excellent track records with Petronas previously (i.e. Malacca regassification terminal).

Forecast  We revised 2%-4% higher our FY14-FY15 net profit estimates to reflect the new orders which were above expectation.

Rating Maintain OUTPERFORM

 Muhibbah remains as our top pick for the small-mid cap construction space. We continue to like Muhibbah for its: (i) unique business structure that offers flexibility in infrastructure, marine engineering and O&G jobs, (ii) ability to leverage on its internationally-recognized Favelle Favco’s name, and (iii) long-term earnings visibility backed by stable and growing recurring income from its concessions.

Valuation  Post earnings revisions, we raise our SoP-based Target Price to RM3.63 from RM3.55. This implies a fwd-PER of 14.4x to FY15 EPS, which is still within mid-cap sized construction peers’ historical PER range of 12-15x.

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

 Delays in construction projects.

 Higher-than-expected input costs.

Source: Kenanga