INVESTMENT HIGHLIGHTS

• 1QFY17 results mixed

• But PBT blemished by transient cutbacks

• Maintain earnings estimates due to robust orderbook.

• Altogether, we upgrade our recommendation to BUY with an adjusted TP of RM3.24 per share

1QFY17 results mixed. Muhibbah’s 1QFY17 earnings of RM23.7m (- 27.0% YoY) met ours and but missed consensus’ expectation at 22.4% and 19.9% of full year estimates respectively. Muhibbah’s earnings were underscored by revenue contraction from segments of: (i) infrastructure construction which declined to RM233.1m (-56%YoY) and (ii) cranes; abated to RM114.2m (-25%YoY).

But PBT blemished by transient cutbacks. Sequentially, the revenue reduction induced segmental transient PBT cutbacks for (i) infrastructure construction sliding to RM23.4m (-21.0%YoY) and, (ii) cranes slumped to RM16.7m (-10%YoY). Albeit the PBT reversals, TPBT surprisingly grew to RM48.8m (+44.0%YoY) as a result of the concession’s PBT escalating to RM31.7m (+66.0%YoY).

Maintain earnings estimates due to robust orderbook. We reiterate our estimates due to the quality orderbook of RM1.86bn, or approximately 36 months (3.5x construction revenue cover) backed by recurring cash flow for its concession asset in Cambodia which has contributed 5-year median of 24.0% percent to its operating income. In relevant to concession; stable departures and arrival of tourists (See Appendix) signifies steady cash flow to Muhibbah. Consequently, balancing negatives such as; (i) lower revenue contribution from Favelle Favco, (ii) recognition/billing gaps, (iii) earnings blips from cost build-up and (iv) transaction risks from on-going jobs in Qatar.

Recommendation. Nevertheless, we maintain our BUY recommendation with an adjusted TP of RM3.24 based on sum of parts valuation. We revalued its infrastructure construction by imputing +18.3% from estimated cash inflows from Qatar projects in our DCF computation (WACC:8.0%) and decreasing the cash flow risk to 55.0% (+5ppts) for the next 4 years and its cash position increased by +23.3% (RM154.2m). Thus, the revaluation resulted in +6.0% increase from our previous TP of RM3.05 implying an attractive +19.2% share price upside (incl. dividend).

Source: MIDF Research - 1 Jun 2017