KEY INVESTMENT HIGHLIGHTS

• 2QFY20 results plunged into losses of -RM26.7m due to the work disruption and travel restriction on COVID-19

• Lower progress billings and travel restrictions impacting the airport concessions division

• Work pace and airport concession to resume at slower pace post-MCO due to stringent COVID-19 measures

• Healthy order book of about RM1.2b which translates into earnings visibility for the next two years

• Downgrade to NEUTRAL with a revised TP of RM0.87

Plunged into losses. Muhibbah Engineering Berhad (MEB)’s 1QFY20 fell into losses of -RM26.7m (-195.4%yoy) as a result of lower profit contribution from airport concession division which had been adversely impacted by the global COVID-19 pandemic. Cumulatively, the group’s 1HFY20 normalised losses plunged -135.5%yoy to -RM23.9m, primarily due to the disruption brought on by the movement control order (MCO) on construction which led to lower progress claim and on the airport business activities. This was below both our and consensus expectations. Moving forward, we expect MEB’s construction activities to gradually recover in 2HFY20 albeit at a slower pace and its airport concession division’s outlook to be tepid.

Revenue front remains sombre. The group’s 1HFY20 results declined by -28.1%yoy to RM604.5m. This was mainly attributable to lower progress billing at its construction division on slower work progress due to the suspension of works imposed during the MCO period which negatively affected the Infrastructure and Cranes division. Moving forward, we expect the restriction of travelling activities emanating from the Covid-19 outbreak would continue to adversely impact the group’s airport concession business which predominantly constitute up to 70% of the group’s earnings.

Construction segment to gradually improve at a slower pace in 2HFY20. The group’s 1HFY20 construction revenue declined by -25.9%yoy to RM505.8m. Moving forward, we expect sequential improvement in the financial performance at this division on the partial resumption of work site operations post-MCO albeit not yet regain pace to the pre-MCO level due to the stringent standard operating procedures (SOPs) needed to put in place to curb potential virus outbreaks. This might lead to slower recovery in terms of progress billings in 2HFY20 before potentially rebounding to full operations in FY21. Meanwhile, we opine that the group’s current healthy outstanding order book of RM1.2b, of which construction division and cranes division make up 58.3% (RM716m) and 41.7% (RM513m) respectively, to continue to provide support to the group’s earnings momentum in the medium-tolonger term.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the MCO on the group’s businesses, particularly on the group’s airport business in Cambodia due to the ongoing COVID-19 pandemic. We are revising our FY20 and FY21 earnings forecast to RM31.1m and RM55.9m respectively as well as introducing our new set of FY22 forecasts.

Target price. We are revising our TP to RM0.87 (previously RM1.35). This is achieved through pegging a forward PER of 8.6x to the group’s FY21 EPS of 10.1sen. Note that the PER is the group’s 5-year historical average.

Downgrade to NEUTRAL. In the near term, we expect that the group’s revenue and earnings prospects to remain lacklustre in anticipation of the slower resumption of construction and travelling activities and limited workforce capacity at work sites in view of the stringent COVID-19 standard operating procedure. This might dampen the earnings prospects in the short-to-medium term as construction progress billings would be affected on slower work progress. On the airport concession business segment, we opine that the earnings contribution to remain subdued given the travelling restrictions imposed arising from the ongoing COVID-19 outbreak in the foreseeable term. Nonetheless, on a longer term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM1.2b which will provide earnings visibility over the next two years. Given the lack of positive catalysts and sombre outlook at its airport concessions division, we are downgrading our recommendation on MEB to NEUTRAL from previously BUY.

Source: MIDF Research - 1 Sept 2020