INVESTMENT HIGHLIGHTS

• Muhibbah Engineering clinched a new job, for the design, supply, installation, testing and commissioning of noise barriers

• The whole project carries a value worth RM165m which expands orderbook to RM1.8b

• Current orderbook already exclude terminated BPA contract

• The new job award shall moderate downside risks

• We upgrade to BUY on the stock with unchanged TP of RM3.15

The company announced its newly clinched job, for the design, supply, installation, testing and commissioning of noise barriers. The job coverage comprises two routes, which are (1) Project Sungai Besi - Ulu Kelang Elevated Expressway, and (2) Project Damansara - Shah Alam Elevated Expressway. Works are scheduled to commence immediately with completion expected in the first quarter 2021.

The whole project carries a value worth RM165m, in approximation. Accordingly, this was the first contract win this year, which expands the group’s orderbook to RM1.8b. Notably, the project win has come earlier than expected, which provides better contribution to core earnings in the immediate term.

Current orderbook already exclude BPA contract. We recall that the quantum of orderbook arrived was after excluding the amount outstanding for Bintulu Port Authority (BPA) project, which was recently terminated on undisclosed basis. Still, we maintain our stance as management is currently seeking fair compensation against the termination.

The new job award to moderate downside risks. We believe this project win following the contract termination will enable the company to moderate its downside risk. Hence, while we believe the contract will contribute positively to gross earnings in the near term, we consider the net impact to be minimal. All in, we opine the job award falls within the range of our near term assumption.

Moving forward, we believe prospect remains bright for Muhibbah, taking into account the contribution from its airport concession and crane segment. As a company, its presence in other specialised business will provide competitive edge against the other domestic construction players. We are encouraged to see that both segments have been significant contributors to earnings. In particular, we noted that its airport concession share of profit has gradually expanded from 49% (in FY14) to 60% (in FY17). It may expand further supported by the rapid +20%yoy growth in passenger traffic for all three airports (Sihanoukville, Phnom Penh, and Siam Reap) in FY18.

Recommendation. We believe the recent BPA contract termination has led to ~-6.0% drop in share price. While we think the market reaction is valid, we believe the strength in Muhibbah’s prospect should not be overlooked. Based on our current assumptions, we upgrade our recommendation to BUY with TP of RM3.15.

Source: MIDF Research - 25 Jan 2019