1H16 CNP of RM54.2m was broadly in line at 56% and 52% of our and streets’ full-year estimates, respectively, as we expect weaker quarters ahead. No dividends were declared, as expected. No changes to our FY16-17E core earnings with an unchanged order book replenishment of RM1.0b. Maintain OUTPERFORM, Target Price unchanged at RM2.53 based on SoP implying FY17E PER of 12.0x.

Broadly within. 1H16 CNP of RM54.2m came in broadly within expectations, accounting for 56%/52% of our/streets’ full-year estimates. We deem the results as broadly in line as we are expecting some weaknesses in coming quarters. No dividend was declared, as expected.

Result highlights. YoY-Ytd, 1H16 CNP only saw mild improvement of 6% despite a 15% increase in revenue due to the reduction in EBIT margins by 3ppt. The decline in the EBIT margins was due to lower contribution from its crane division, which saw 20% decline in both revenue and pre-tax profit due to depleting order book and lack of sizeable replenishments. While its associate contributions improved by 17%, the positive impact was negated by higher depreciation cost, which increased by 8%. The major driver to the improvements for its 1H16 CNP are mainly due to lower effective tax rate of 21% vis-à-vis 24% in 1H15 coupled with lower minority interest, which came off by 34%.

QoQ, 2Q16 CNP plunged by 32% driven by 16% decrease in revenue due to slower progressive billings from its construction division and lower contributions from its associates (-23%) i.e. Cambodian airport and road care.

Outlook. Currently, MUHIBAH’s outstanding order book stands at c.RM1.9b, providing the group at least two years of visibility. To date, they only manage to secure c.RM320.0m vis-à-vis our FY16E target of RM1.0b. In the mid-to-near term, MUHIBAH will continue to focus on RAPID while bidding for MRT2 and other infrastructure jobs like LRT3, which would be sufficient to make up to our RM1.0b target. No changes to our FY16-17E core earnings.

OUTPERFORM maintained. We continue to reiterate our OUTPERFORM call on MUHIBAH as we like its edge in bidding for RAPID projects and diversified earnings profile. There is no change to our SoP-based TP of RM2.53, which implies FY17E PER of 12.0x. This TP is inline with our target small-and-mid caps construction peers’ range of 9.0–13.0x.

Source: Kenanga Research - 1 Sep 2016