9MFY19 CNP of RM95.2m (down 18% YoY) is below expectations, representing 60%/64% of our/consensus full year estimates. No dividend was declared. We cut our FY19- 20E earnings by 21-22% to take into account weaker earnings from the infrastructure construction division. However, rising contribution from its concession business is a bright spot. Maintain OP with a lower Target Price of RM2.90 (from RM3.20 previously).

Below expectations. 9MFY19 CNP of RM95.2m (down 18% YoY) came in below expectations, representing 60%/64% of our/consensus full-year forecasts. No dividend was declared.

Results’ highlights. YoY, 9MFY19 revenue dipped 5% as the infrastructure construction segment suffered a 24% decline in turnover. Consequently, 9MFY19 CNP fell 18% as profit contribution from the infrastructure construction division plunged 61%. A silver lining though is the rising after-tax profit contribution from its share of concession business (which jumped 21%). QoQ, 3QFY19 CNP came in broadly flat at RM28.8m as the infrastructure construction division was barely profitable which was mitigated by higher contributions from the cranes (+36%) and concession (+11%) segments.

Steady outlook. Muhibbah’s current outstanding order-book is worth c.RM1.6b, comprising c.RM1.1b of construction jobs and RM564m from the cranes division. This will provide forward earnings visibility. A positive take-away from the results is the continued robust performance of the concession segment, which has been driven by rising contributions from the airports concession in Cambodia.

Trimming earnings estimates. Post results, we have reduced our net profit forecasts to RM123m (-22%) in FY19 and RM130m (-21%) in FY20 to take into account weaker contributions from the infrastructure construction division, but partly mitigated by increased profit from the concession business.

Maintain OUTPERFORM with a lower SoP-based Target Price of RM2.90 (from RM3.20 previously) (see table overleaf). This implies a forward PER of 10.7x on FY20E earnings.

Risks to our call include: (i) lower-than-expected order-book replenishment target, (ii) delays in construction progress, and (iii) sharp spike in raw material costs.

Source: Kenanga Research - 29 Nov 2019