Muhibbah’s share price was bashed down 20% to RM2.25 from RM2.81 in just 3 trading days. We believe this is due to the misconception of Muhibbah losing the bid for RM1.6b Regassification Terminal (RGT) and storage tanks at Pengerang, Johor. We met Muhibbah’s management yesterday and were relieved after management cleared the air; Muhibbah never bidded for that particular project. Management clarified that the Pengerang RGT project is worth RM2.7b which is split into 2 packages; 1st Package: the RM1.6b RGT and storage tanks, and 2nd Package: RM1.1b Pengerang RGT’s Jetty works. Muhibbah is bidding for the 2nd Package instead of the 1st Package. In addition, Muhibbah is also bidding for RAPID’s Refinery subcontract works which collectively could be worth about RM500m – RM1.0b. In total, Muhibbah has about RM2.5b worth of tenderbook in Pengerang and RAPID (including the smallish jobs), which is half of its total tenderbook of RM5.0b. We reiterate our OUTPERFORM call with unchanged TP of RM3.63. Muhibbah remains our Top Pick for the small-mid cap construction space. We view the recent sell-down as an opportunity for investors to accumulate the stock as the group’s fundamentals is intact on the back of RM2.3b orderbook and RM5.0b tenderbook.

Management cleared the air. Muhibbah’s share price recently took a 20% beating to RM2.25 from RM2.81 in just 3 trading days. We believe this is due to the misconception of Muhibbah losing the bid for RM1.6b Regassification Terminal at Pengerang, Johor. We met Muhibbah’s management yesterday and came back from the meeting with POSITIVE feeling. We were relieved after management cleared the air that Muhibbah never bid for the RM1.6b Pengerang RGT that was recently won by Samsung C&T.

Bidding for the RM1.1b RGT Jetty, not the RM1.6b RGT and storage tanks. Management explained that the total value of Pengerang RGT is RM2.7b which is split into 2 packages; 1st Package: RM1.6b RGT and storage tank; and 2^nd Package: RM1.1b RGT’s Jetty works. The group is actually bidding for the latter’s package instead of the 1st Package as jetty work is always the group’s area of expertise. We noted that there are only 2 bidders for the package; Muhibbah and another overseas contractor. We believe there is high likelihood that Muhibbah will win the job given its strong track record of building the first Malaysia’s regasification terminal in Malacca in 2010-2013. If Muhibbah secures this job, it will easily exceed our new orderbook forecast of RM800m next year. We expect this job to be awarded by Petronas 3-6 months from now.

Total tenderbook of RM5.0b, 50% from Pengerang and RAPID. Additionally, Muhibbah is also participating in RAPID’s Refineries subcontract works which collectively could be worth about RM500m – RM1.0b. We believe these jobs could be announced anytime soon as the main packages have already been awarded to the main contractors. All in, Muhibbah has about RM2.5b worth of tenderbook in RAPID (including the smallish jobs), which is half of its total tenderbook of RM5.0b.

No changes to estimates. Muhibbah’s orderbook currently stands at RM2.3b worth of unbilled orderbook of which RM875m is from infrastructure construction, RM1.2b from cranes division, and RM257 from shipyard division. We are maintaining our FY14-15E orderbook replenishment assumptions at RM700m-RM800m.

Maintain OUTPERFORM with unchanged TP of RM3.63. Muhibbah remains our Top Pick in the small-mid cap construction space. We view the recent sell-down as an opportunity for investors to accumulate the stock as the group’s fundamentals stay intact; (i) valuation wise, the stock is currently trading at fwd-PER of 8.9x visà-vis 14x average mid-cap construction, (ii) Muhibbah still has strong orderbook of RM2.3b and RM5.0b tenderbook, and (iii) our assumption is on the conservative side i.e. forecasting only RM800m vis-à-vis potential RM1.5b worth of new orderbook. While the stock may have been affected by the recent sell-downs in the Oil & Gas space given its exposure to the sector, we like to highlight that jobs related to the RGT will have the greatest chance of materializing given the needs of the Power sector by 2017-18.

Source: Kenanga