INVESTMENT HIGHLIGHTS

• Notice of the port infra contract termination was issued by Bintulu Port Authority

• The contract was awarded in April 2017 to Muhibbah Viccana JV, with estimated value of RM584.8m

• Completion is scheduled at the end of CY19

• Our current progress rate estimate is around 50%

• We downgrade the stock to NEUTRAL with unchanged TP of RM3.15

Announcement. According to a Bursa’s announcement, Muhibbah Viccana JV has received a notice from Bintulu Port Authority to terminate its port infra contract. The contract was awarded to the JV Company in April 2017.

Background of contract. Muhibbah Engineering has a 51% equity interest in the Muhibbah Viccana JV. In April 2017, the JV was awarded a contract to undertake the development of a supply base wharf and associated works in the second harbour basin at Bintulu Port in Sarawak. The contract value was estimated at RM584.8m, with Muhibbah’s share of works carried a value worth RM400m. The job scope involved the construction of wharf, jetty and other associated facilities. Accordingly, it was scheduled to complete at the end of CY19.

Progress work. Our rough estimate arrived to a progress work at around 45-50%. That leaves the contract’s current unbilled value at range of RM200m-RM220m, or circa 9.7% of Muhibbah’s RM2.1b outstanding orderbook.

Impact on earnings. Based on the current circumstance, we believe that risk is concentrated on the near-term earnings projection. Furthermore, we noted that the impact on earnings is muted for FY20 onward. Whilst the outcome has yet to be finalized, our assumption is pointing towards a manageable setback. In this regard, we opt to maintain our estimates at this juncture given the uncertainties of the final outcome. We believe this is apt as we make allowance for the ongoing negotiation and discussion with Bintulu Port Authority.

Downgrade to NEUTRAL with unchanged TP. Nonetheless, we feel that a downgrade to NEUTRAL is warranted. We believe the current TP of RM3.15 displayed our conservative stance, as to mitigate the risk for near term adjustment. Assuming that fair compensation for Muhibbah is agreed upon, we need to caution that reparation could take a while to materialize. Based on current price, our TP implies 7.5% upside to investors and earnings yield of 6.7%. Moving forward, we believe any retracement in share price will unveil attractive position for entry.

Source: MIDF Research - 18 Jan 2019