INVESTMENT HIGHLIGHTS

• Headline earnings met consensus estimates, but ahead of ours on the back of stronger PBT margin

• Muhibbah posted +53.3%yoy growth of quarterly PBT, attributable to higher contribution from concession and associates

• Earnings estimates adjusted to reflect on the deviation recognized

• We reiterate our BUY call on the stock with unchanged TP of RM3.15

Results met consensus estimates. Muhibbah’s 9MFY18 earnings of RM106.9m (+12.4%yoy) met consensus’ expectation at 72.1%, but ahead of our full year estimates at 98.7% respectively. The deviation from our forecast was due to better than expected margin conversion, against the group’s revenue which grew marginally by 3.4%yoy in 9MFY18. We understand from management that the improvement in earnings was primarily due to better contribution from concession division. Notably, the division recorded +3.6% higher revenue, while fetching 45.3% (+12.0pptsyoy) margin at PBT level in 9MFY18.

PBT seen soaring. Muhibbah recorded PBT of RM77.6m in 3QFY18, posting a significant +53.3%yoy increase from the same period last year. Accordingly, the cumulative sum in 9MFY18 arrived at RM191.1m which grew +17.2%yoy respectively. We noted that the growth in PBT was partly due to improved share results of associates at RM116.0m (+23.4%yoy).

Earnings estimates adjusted. We are prompted to adjust our earnings forecast to reflect the deviation aforementioned. Our forecast was premised on the quality order book of RM1.8bn, backed by recurring cash flow for its concession asset in Cambodia. Its airport concession through partnership with Vinci has contributed 5-year average of 24.0% percent to its operating income. Consequent to the revision, we arrived at earnings estimates of RM123.84m, for FY18 while maintaining our FY19’s. Our new estimate was realized after making allowance for the adjustment to bottom-line margins in FY18.

Recommendation. Given the latest change in estimates, we maintain our BUY recommendation on the stock with an unchanged TP of RM3.15. We ascribe PE multiples of 15x to FY19EPS, which reflects the conservative current sector wide valuation on construction stocks. Our TP implies a +15.6% upside and earnings yield of 6.6%.

Source: MIDF Research - 29 Nov 2018