Muhibbah shares have been hit by adverse news flows regarding its Cambodia airports. While there may be longer term earnings risk due to competition from new airports, this could be mitigated by an exclusivity clause in the concession agreements. Meanwhile, the immediate concern arising from less passenger traffic at the airports amid the Covid-19 outbreak is expected to blow over eventually. Maintain OP with a lower SoP-derived TP of RM2.35 (from RM2.90).

Double whammy. Muhibbah’s share price plunged from RM2.31 on 21 Jan to as low as RM1.59 last Tuesday before settling at RM1.96 yesterday, a loss of 15% or RM169m in market cap. In essence, the stock was facing intense selling pressures following news of construction of new airports in Cambodia (which would then impact its existing airports) and the fast spreading Covid-19 (which has affected travelling).

New airports rivalry? Recent media reports have mentioned that construction works of new airports in Phnom Penh and Siem Reap are proceeding. According to the news, the new airports are targeted to be completed in mid-2022 (in Phnom Penh) and 2022/23 (in Siem Reap). This could then directly impact Muhibbah’s existing airports.

Questions still abound. The jury is still out whether the new airports will take shape according to plan given the following reasons; (a) the local government has yet to sign any concession agreements even though construction works have started, (b) the existing concessionaire (Societe Concessionaire de l’Aeroport (SCA), in which Muhibbah holds a 21% effective stake) has exclusive rights for airport operation in Phnom Penh. Apparently, the new airport operator in Phnom Penh has recently engaged with SCA to explore the possibility of collaborations, (c) the high investment costs to build the new airports – to the tune of USD1.5b for the airport in Phnom Penh and USD1b in Siem Reap – may lead to possible construction delays.

Exclusive rights protection? In the scenario where both the new airports come on stream, Muhibbah’s existing airports in Phnom Penh (which has an exclusive clause in the concession agreement) and Siem Reap (non-exclusive) may either be asked to close down or continue their operations. Either way, this will inevitably cause earnings to be significantly impacted. Muhibbah, via SCA, has exposure to 3 airports in Cambodia (more details overleaf), which are captured in the concessions division. This segment contributed pre-tax profit (before group eliminations and MI) of RM142.6m (or 59%) to Muhibbah in 9MFY19. Nonetheless, in such an event, SCA could seek compensation (for an undisclosed amount) from the government on account of its exclusive rights. We gather under the agreement, any legal disputes will be settled via arbitrations in the court of Switzerland.

Coronavirus impact likely to be short-term. Meanwhile, we are not overly concern on adverse lasting impact from less travelling due to the coronavirus scare. Most likely, passenger traffic at its airports (which plunged as much as 40% recently due to the slump in Chinese travellers who typically made up slightly more than 1/3 of tourist arrivals) is expected to recover eventually when the outbreak is contained in the coming months.

Still an OUTPERFORM. We have: (a) adjusted our CNP by -7.0% for FY19 and +12.6% for FY20; and (b) lowered our SoP-derived TP from RM2.90 to RM2.35, as we tweak our profit contributions/valuation for its Cambodia airport concessions. To put things in perspective, our implied PER valuation of 11x for the airport concession business (given its smaller size) appears reasonable relative to CY20 PER of 17x for MAHB and 36x for Airport of Thailand based on consensus earnings.

Source: Kenanga Research - 14 Feb 2020