News  Muhibbah announced yesterday that it has secured a contract from Westport (MP; TP: RM3.13) to build Part A of 300 meter Container Terminal 8 wharf & access bridges and associated works at Port Klang. The project total contract value is RM135m, which is expected to be completed within 12 months.

 Muhibbah also mentioned that Westport has an option within 6 month from the date of site possession of Part A to award to Muhibbah the second part of 300 meter of Container Terminal 8 wharf (Part B) with total contract value of RM256m.

Comments  We are POSITIVE on the announcement as: (i) assuming 5% net margin, this contract may contribute about RM6.75m net profit (1.6 sen/share) (6.5% of our FY15 net profit) to Muhibbah next year, (ii) if Westport exercises its option to award Muhibbah the Part B (which we think is likely given its track record in executing marine-related works), it may contribute another about RM6.1m (1.5 sen/share) in 2HFY15-2016, and (iii) we estimate this contract has boosted its infra division’s orderbook to RM1.0b from RM875m.

Outlook  Sizeable orderbook provides two years’ earnings visibility. This contract has boosted Muhibbah’s outstanding orderbook to RM2.4b from RM2.3b previously. Out of RM2.4b, RM1.0b is from infrastructure construction, RM1.2b from cranes division, and RM257 from shipyard division. This will provide Muhibbah earnings visibility for the next two years.

 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 off-loading facilities jetty) already awarded to various contractors (since June 2014). Given that the bulk of Muhibbah’s tenderbook is from RAPID and Pengerang projects, we reaffirm our view that Muhibbah will likely benefit from the contracts in RAPID and Pengerang. Note that Muhibbah also has excellent track records with Petronas previously (i.e. Malacca regasification terminal).

Forecast  Unchanged as the contract value well is within our estimates. We estimate Muhibbah to secure RM700m worth of new contracts (in infra division) this year. So far, it has secured about RM534m. We expect the group to secure another RM166m worth of contracts before year-end. We also expect the group to secure another RM700m worth of new orders next year.

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.

 We also believe that the recent misunderstanding of Muhibbah “losing” the regasification terminal project (RGT) to Samsung C&T in Pengerang provides a buying opportunity. Furthermore, we are not concerned on Petronas reviewing the capex affecting Muhibbah as both RAPID and Pengerang projects are already on-going with most infrastructure and main contracts were already awarded.

Valuation  Maintain our SoP-based Target Price of RM3.63. 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