Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit of RM42.5m was within our expectation but came below consensus, accounting for 49% and 44% of our and consensus full-year estimates, respectively. We believe that consensus might be slightly aggressive on its operating margins assumptions. Hence, the results let down.

To date, MUHIBAH has secured c.RM543m worth of orderbook replenishments, accounting for 68% of our FY15 orderbook replenishment assumptions for its infra division.

Dividends

No dividend declared, as expected.

Key Results Highlights

YoY, its 1H15 core net profit of RM42.5m continued to see a marginal improvement, of 4%, despite a lower revenue of RM773.5m (-10%), mainly driven by the improvements in EBIT margin from to 6% to 7% coupled with a 7% improvement from its associates of RM27.8m. That said, a lower effective tax rate of 24% vis-àvis 1H14’s effective tax rate of 31% also help lifted its profits.

QoQ, 2Q15 core net profit declined by 17% to RM19.3m albeit the improvement in revenue of RM410.3m (+13%). The main drag on its performance was mainly attributable to a higher net interest expense (+106%) and lower contribution from its associates (-30%) coupled with a higher effective tax rate of 30% (1Q15, 19%).

Outlook

Currently, its outstanding orderbook stands at RM2.1b providing the group at least two years of visibility, and we believe that the group will continue to focus on bidding for more RAPID projects of which they have secured two packages this years.

Change to Forecasts

No changes to earnings.

Rating

Maintain OUTPERFORM

Valuation

We reiterate OUTPERFORM call on MUHIBAH with a lower TP of RM2.72 (previously, RM2.88) as we lowered our Targeted PER for its infra and construction division to 10x from 14x previously, as we have seen the construction sector’s valuation de-rated slightly over the quarter due to negative market sentiment. Our SoP-based TP of RM2.72 implies FY16E PER of 12.5x (0.5x SD), that is inline with our target small-mid cap construction peers’ range of 9.0x – 14.0x.

Risks to Our Call

Failure in meeting our new contracts assumption

Delays in construction projects

Higher-than-expected input costs

Source: Kenanga Research - 1 Sep 2015