INVESTMENT HIGHLIGHTS

• Pressured share price timely for opportunity taking

• Attractive underlying dynamics

• Healthy working capital could provide fillip for overseas jobs

• Maintain BUY recommendation with TP of RM3.05

???????Muhibbah’s pressured share price timely for opportunity taking. The case for Muhibbah positive underlying fundamentals are influenced by the following;

A. Attractive underlying dynamics. Muhibbah’s orderbook of RM2.1bn comprises of RM1.4bn from infrastructure segment and RM680m from Favelle Favco. Despite the odd of falling offshore contracts, Favelle Favco recently bagged RM64m of tower crane job. The orderbook plays a strong hand in Muhibbah’s bottom line as it contributes; (i) approximately 36 months construction backlog, (ii) 3.1x orderbook/construction revenue cover and (iii) 0.05x working capital/orderbook cover. Apart from that, we reckon that concession’s PBT is poised for recovery in FYE16 as a result of growing number tourists especially from China and South Korea to Phnom Penh and Siem Reap airports which was lifted by +8.0% and 8.8% YoY respectively. (Figure 1 and 2).We are forecasting that the influx of tourist for December FYE16 and January FYE17 to be in excess of 95,000 tourist per month. This is supported by the consistent arrivals of tourist from China and South Korea. We estimate that the airport concession will contribute at least 15.5% of PBT in FYE16 and FYE17.(Figure 3 and 4)

B. Healthy working capital provides fillip to flows of jobs from MANATEQ. Muhibbah’s healthy working capital grew 10x from 2014 to 2015 and we are expecting the growth rate to hover around 10.0% in FYE16. The working capital illustrates the company’s inherent strength to clinch projects especially from MANATEQ in Qatar. MANATEQ is a state-owned enterprise (SOE) by the government of Qatar to manage and establish economic zones. The zones are divided into the locations of Ras Bufontas, Um Alhoul and Al Karaana. Combined with Muhibbah’s past rack record of building the catering facility of New Doha International Airport and the recent Phase 1 of Um Alhoul Economic Zone, we believe that the largesse of jobs from MANATEQ Qatar beckons in near term. The improvement of CFO and working capital signals that Muhibbah will be able to clinch projects within the ranges of RM400m-RM500m. For the past 3 years, Muhibbah has been consistent and selective with jobs that gives higher visibility and lower execution risk. Notably, Qatar is rated as AA with stable outlook by Standard & Poor, Aa2 with negative outlook by Moody’s and, AA with stable outlook by Fitch.

Recommendation. We maintain our BUY recommendation with a TP of RM3.05 based on our sum-of-parts valuation. Additionally, Muhibbah’s current EV/EBITDA of 12.2x is below it peers median of 13.9x implying an attractive discount

Source: MIDF Research - 3 Feb 2017