What’s New

• 4Q16 results slightly above expectations

• Infrastructure orderbook on stronger footing

• FY16 Cambodian airport traffic volume grew 9% y-o-y

• Maintain BUY and TP of RM3.10, based on SOP

Scarcity premium contractor

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 9% to 7.0m in FY16. We estimate its 21% stake in the Cambodia airport concession to be worth RM677m (DCF, WACC 10% 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.

Still needs more wins. Contract flows for its infrastructure division 2016 have been slow with just two wins, 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. It started 2017 firmer with a QAR356.7m (c.RM438m) win for infrastructure- related works in Qatar. Though it has a 49% interest in the JV which won this contract, it will do most of the work. For its crane division, it has also replenished orders by RM64m early this year, largely coming from tower related cranes. Its total outstanding orderbook as at February 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 - 1 Mar 2017