INVESTMENT HIGHLIGHTS

• Defensive business model despite grim sector outlook

• Cost efficiency important to defend its margin

• Qatar projects are a catalyst to earnings upside

• Maintain BUY recommendation with TP of RM3.45

Defensive business model despite grim sector outlook. Muhibbah remains in our favourable radar due to its strong competency in replenishing orderbook despite the slow-down in infrastructure projects nationwide in value and units. (Figure 1 and 2). Year-to-date, its share price performance returned a +23.7%. We are adamant to maintain our earnings estimates for FYE18/FYE19 due to positive prospects from; Qatar and CAPEX reduction especially from Cambodia’s concession.

Cost efficiency important to defend its margin. We have forecasted that CAPEX for Muhibbah’s FYE17 performance will stabilize as the domestic terminal expansion of Phnom Penh International Airport (RM88m) will be completed by year-end. For the past 11-years its CAPEX has averaged RM94m implying an opportunity to increase cost efficiency (Figure 3). At the same time, Muhibbah total cost*-to-revenue (TCR) is unwavering registering a mean of 98.0% for the past 11-years. We are expecting a lower total cost-to-revenue ratio of 80.0% in order to exceed our FY17 PATAMI estimate of RM34.15m by adding RM6.06m over the next 3 quarters successively. Together, reduction in TCR and stable CAPEX will ensure the sustainability of its profit margin of 6.8% (Figure 4) and positive earnings momentum.

Qatar projects are a catalyst to earnings upside. We view Muhibbah’s Qatar venture as a catalyst to earnings upside instead of a wild card. Firstly, amidst the diplomatic row, Qatar Airways has announced in late September 2017 that it will triple its capacity in Hamad International Airport (HIA). This is a positive sign for Muhibbah implying future expansion for cargo terminal. We believe Muhibbah stands a strong chance to win transport related packages as they have strong track record building the catering facility for HIA (RM1.23bn) in 2007. Secondly, industrial real estate in Doha has picked-up pace covering nearly 13m sq.m of gross leasable area of available space. Phase 1 of Ras Bufontas and Umm Al Houl Special economic zones is slated for completion in FY18. Additionally, Mesaiid Industrial City’s expansion in underway and, MANATEQ has introduced 4 logistics hub; Al Wakrah, Birkat Al Awamer, Aba Saleel, Jery Al Samur (Figure 5) in which Muhibbah’s expertise in civil engineering comes in handy to win tenders. We estimate that Muhibbah will be able to clinch at least RM200m worth of projects from Qatar potentially in upcoming quarters.

Recommendation. Altogether, Muhibbah has an orderbook size of RM1.8bn (implying a 1.5x construction revenue cover), coupled with an expected +25% of its PBT ring-fenced in FYE17/FYE18 from its concession revenue stream in Cambodia. Muhibbah is expected continue its performance to meet our earnings forecast in the 12MFYE17. Thus, we maintain our BUY recommendation with a TP of RM3.45 based on our sum-of-parts valuation. Muhibbah’s current EV/EBITDA of 12.5x is below it KLCON Index peers mean of 16.2x implying an attractive discount.

Source: MIDF Research - 3 Oct 2017