Awaiting more contract wins

Scarcity premium. Muhibbah is an ideal proxy to the 11th Malaysian Plan given its expertise in three core areas: i) civil engineering; ii) marine-based construction, and iii) offshore and onshore fabrication works, where its Petronas licence offers an advantage. Other contractors do not have this combination to vie in the competitive civil engineering space.

Cash cow: Cambodia airport concession. Siam Reap and Phnom Penh airports have doubled their capacity to 12m passengers. Passenger arrivals grew 13% to 6.5m in FY15. We estimate its 21% stake in the Cambodia airport concession is worth RM677m (DCF, WACC 10%, RM/USD 4.15, and average passenger traffic growth of 5% p.a. until 2040), which is already about two-thirds of the stock?s market capitalisation. Revenues are also in USD which can help boost its earnings given the weak MYR.

In need for more wins. Contract flows so far for 2016 have been slow but we understand there could be some chunky wins soon. For its infrastructure division, it has won two contracts, a RM137m building contract from PETRONAS Carigali, in which it has a 70% stake, implying a contract value of RM96m and a smallish contract for the Phnom Penh airport expansion. For its shipyard division, it clinched a RM92m contact win from the Ministry of Transport to undertake the design and construction of a multi-purpose vessel for the Malaysia Marine Department. Its total outstanding orderbook as at end-November is now RM1.7bn, of which RM1bn comes from infrastructure.

Valuation

Muhibbah is a BUY with a SOP-derived TP of RM3.10. We value the stock based on SOP as we think this better reflects its diversified business while also capturing its cash-generating Cambodian concession.

Key Risks to Our View

Delays in project flows and sudden spikes in raw material costs could dampen its earnings outlook.

Source: Alliance Research - 30 Nov 2016