1QFY20 earnings only accounted for 4%/3% of our/consensus full-year forecast due to unexpected loss in its construction division and weaker-than-expected contributions from its Cambodian airports which were hit by Covid-19. Cut FY20E/FY21E earnings by 65%/30% but maintain OUTPERFORM with lower TP of RM1.15, given the extremely attractive valuations.

Below expectations. 1QFY20 CNP of RM3.1m missed expectations, accounting for only 4%/3% of our/consensus full-year forecast. The negative variance stemmed from: (i) unexpected loss in the construction segment, dragged by overseas division, and (ii) lower than-expected contributions from its Cambodian airports, hit by Covid- 19. No dividends announced as expected.

QoQ, earnings improved to RM3.1m (from a loss of RM50.1m) solely because of huge provisions made for project claims and variation orders from its construction division in the last quarter.

YoY, CNP was down 92% mainly due to weaker associate contributions (-67%) from its 21%-owned Cambodian airports which saw passenger traffic plunging to 1.9m (-42%). Note that Cambodia imposed entry bans to 6 countries (Spain, Italy, France, Germany, the United States and Iran) from 17th March till 20th May 2020. Its construction division which registered losses before tax (to the tune of RM11m, after accounting for eliminations) also contributed to the overall drop.

2QFY20 earnings will be even worse as this period was the peak of Covid-19 travel restrictions which could possibly see its Cambodian airports reporting losses. Even now, tourists are deterred from travelling into Cambodia given the multiple SOPs and restrictions imposed i.e. compulsory testing for Covid-19 upon arrival. Current order-book of RM1.3b provides visibility for a year.

Earnings cut. Post results, we cut our FY20E/FY21E CNP by 65%/30% after factoring: (i) losses of RM20m/RM10m for its construction division (vs. initial profit of RM17m/18m), and (ii) lower passenger traffic of 5m/8m (from 7.5m/10m) for its Cambodian airports due to Covid-19, respectively.

Valuation too attractive to ignore. Despite the huge slash in earnings coupled with the fact that MUHIBAH’s airports are direct victims of the Covid-19 pandemic, we find its valuations just too attractive to ignore at this juncture. Hence, we maintain OUTPERFORM but with a lower SoP-based TP of RM1.15 (from RM1.20 previously) on lowered BV for its construction segment.

In our SoP, we have: (i) ascribed a -2.5SD PBV (lowest in our universe) to its construction division due to the volatile profits, (ii) fully omitted Phnom Penh airport from the concession valuation, and (iii) only value FAVCO at RM1.84 (vs current share price of RM2.29). Yet, our conservative TP of RM1.15 still provides 20% upside from current level.

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 - 23 Jun 2020