Investment Highlights

• Given Street’s blessing

• Positioned for another round of local and Qatar job wins

• Expecting another smooth sailing year

• Maintain BUY recommendation with an adjusted TP of RM3.60

Given Street’s blessing. Muhibbah started the year with Street’s confidence - its share price advanced +13.7% for the first week of FY18 fomenting a closer look at its orderbook. For FY17, Muhibbah has secured RM1.6bn worth of job wins; +62.6% above our award value estimates of RM600m. Its awarded contract in Malaysia amounted to 66.6% of its FY17 job wins. This indicates quality orderbook whereby risks of translation and regional politics are reduced. Justifiably, its flitting share price scores a strong fundamental overtone where in total its orderbook amounted to RM2.1bn.

Positioned for another round of local and Qatar job wins. For FYE18, we’re are expecting that Muhibbah would secure RM700m worth of jobs with Qatar and Malaysian infrastructure projects given the most spotlight which is in-line with our forecast. Despite the trade blockade by Saudi-led coalition to Qatar, project win from the latter is not entirely muted as in Oct-17 Muhibbah won another award of RM59.1m (49.0% JV) albeit lower than the previous award of RM438.1m in January. The balancing factor would be of PBT contribution of 30.2% quarterly for the past two years from its airport concessions in Cambodia.

Expecting another smooth sailing year. Therefore earnings wise, we are expecting another smooth sailing year for Muhibbah despite the grim outlook for its cranes segment via Favelle Favco. But then, comparing the competitive business environment for crane manufacturers worldwide such as Manitowoc (negative earnings reported year-to-date) and Liebherr. Favelle Favco would stand a better chance to survive due to its operational size, customization expertise and presence in South East Asia and Middle East. Noticeably, earnings started to grow in Q4, 2016 illustrating the accretion of projects that reflects a better risk/reward profile on the back of +6.0% operation margin. Thus, we make no changes to our earnings assumptions as Muhibbah is backed by total orderbook of RM2.1bn with average backlog duration of 22 months or 1.7x construction revenue cover.

Recommendation. We reiterate our BUY recommendation with an adjusted TP of RM3.60 per share on the basis of our sum-of-parts methodology. Muhibbah remains as one of our top pick for small-cap construction companies. Its shares are trading at an undemanding PER of 12.1x below the KLCI average of 17.0x by 5.5ppts and its peers in KL Construction Index of 23.0x by 11.5ppts.

Source: MIDF Research - 10 Jan 2018