News  Muhibbah announced yesterday that it has secured a contract worth USD32m (approximately RM116m) from Tecnicas Reunidas, S.A. Group. The job scope includes design and building of temporary construction facilities and accommodation camp for Package III in PETRONAS’ Refinery and Petrochemicals Integrated Development (RAPID) project in Pengerang, Johor, Malaysia. The construction is scheduled to commence in 1Q15 and expected to be completed by 1Q16.

Comments  The new win does cast a more positive sentiment on Muhibbah being its first RAPID contract, which could potentially mark the beginning for it to secure more jobs in RAPID going forward. Management updated that the Group’s tenderbook stands at about RM4.0b with at least RM1.0b coming from RAPID. However, financial impact is NEUTRAL due to our orderbook replenishment assumptions. This job constitutes 15% of our FY15 new contracts assumption for infra division. Assuming 5% PBT margin, this project could add RM4.4m to the Group’s bottomline or 5.1% of FY15E net profit.

 On the flip side, the RM1.1b Pengerang RGT jetty works are not in their tenderbook anymore. Management updated that the RM1.1b Pengerang RGT jetty works, in which Muhibbah was previously involved, are no longer in its tenderbook. We were negatively surprised with this news as Muhibbah could easily exceed our FY15 replenishment assumption of RM800m if the Group were to secure this job.

 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 RM245m from shipyard division. This will provide Muhibbah earnings visibility for the next two years. Minus the RM1.1b RGT jetty works, the Group’s tenderbook stands at about RM4.0b.

Forecast  Lowering FY14-15E net profits by 2.0% and 16.7%, respectively, after downward adjustments of orderbook replenishment forecasts (refer overleaf).

Rating Maintain OUTPERFORM Valuation  Despite the Group lost the RM1.1b Pengerang RGT jetty works, we reaffirm our view that Muhibbah is one of the beneficiaries of the RM89b RAPID project. This new job announcement could be a prelude to a longer pipeline of sub-contract works from RAPID, which bodes well for the company.

 We revised lower our SoP-based Target Price to RM2.80 (from RM3.63 previously) following: (i) downwards earnings adjustments, and (ii) de-rating of its crane and shipyard divisions given their exposure to the gloomy O&G sector. We are now assigning a lower FY15E PER of 10x (from 12.0x) and 7.0x (from 9.0x) for its crane and shipyard divisions, respectively, in our SoP calculations. Our new TP of RM2.80 implied a FY15E PER of 13.3x, in line with midcap construction peers’ range of 12.0-15.0x.

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

 Delays in construction projects.

 Higher-than-expected input costs. 

Source: Kenanga