KEY INVESTMENT HIGHLIGHTS

• 3QFY20 results plunged into deeper losses of -RM30.9m due to the work disruption and travel restriction on Covid-19

• Consequently, 9MFY20 results remained loss-making at -RM54.0m; below our and consensus expectations

• Construction work pace and traffic at its airport concession remain depressed due to stringent COVID-19 measures

• Depleting order book at about RM1.1b could only last less than two years, a main concern on future earnings growth

• Downgrade to SELL with a revised TP of RM0.76

Losses widened. Muhibbah Engineering Berhad (MEB)’s 3QFY20 fell into deeper losses of -RM30.9m (vs 2QFY20: -RM26.7m and 3QFY19: RM29.4m) on lower profit contribution from airport concession division which had been adversely impacted by the global Covid-19 pandemic. Cumulatively, the group’s 9MFY20 normalised losses plunged further to - RM54.0m, primarily attributable to the continuous poor performance from its construction segment which led to lower progress claim and travel restriction severely impacting its airport business activities. This was below both our and consensus expectations. Moving forward, we expect MEB’s financial performance to remain depressed in the foreseeable term.

Airport passengers count remains low. The outlook of its 21%- owned Cambodia Airports, which predominantly constitute up to 70% of the group’s earnings, to stay bleak. This was primarily attributable to the sharp fall in airport passengers by -77.0%yoy to 2.1m in 9MFY20 which is caused by change in travel pattern and travel restrictions to curb the spread of Covid-19 cases. Consequently, the group’s 9MFY20 revenue and profit before tax (PBT) from its concession business declined precipitately by -54.9%yoy and -92.9%yoy to RM142.1m and RM10.1m respectively. Moving forward, we expect the restriction of travelling activities emanating from the Covid-19 outbreak would continue to beleaguer the group’s airport concession. We also posit that the recent contract award to the ‘Metallurgical Corporation of China’ to construct a new Phnom Penh airport also cast a doubt on the long term earning prospects of the group’s concession business segment.

Construction segment. The group’s 9MFY20 PBT from this segment fell into losses of -RM27.8m (-207.2%yoy) on higher operating expenses related to the Covid-19 measures and lower progress billings due to slow resumption of construction work progress. Meanwhile, we opine that the group’s shrinking outstanding order book of RM1.1b, of which construction division and cranes division make up 55% (RM633m) and 45% (RM511m) respectively, would not provide the group with a much earnings prospects going forward in view of the current weak replenishment rate.

Dividend. During the quarter-under-review, the group has declared a first and final dividend of 2.5sen per ordinary share in respect of the FY19 amounting to RM12.1m.

Earnings estimates. We are now projecting the group to plunge into deeper losses of -RM65.3m in FY20 before rebounding to full operations in coming year. Meanwhile, we are also inputting a more conservative earnings forecast for both FY21 (RM42.5m) and FY22 (RM51.0m). This is premised on our lower assumption of earnings contribution from its airport concession business in the near-to-medium term and a slower recovery of its construction segment.

Target price. We are lowering our TP to RM0.76 (previously RM0.87). This is achieved through pegging a forward PER of 8.6x to the group’s FY21 EPS of 8.8sen. Note that the PER is the group’s 5-year historical average.

Downgrade to SELL. In the near term, we expect that the group’s revenue and earnings prospects to remain under pressure in anticipation of the slower resumption of construction and travelling activities as well as limited workforce capacity at work sites in view of the stringent Covid-19 standard operating procedure. This will cause the earnings prospects to be appalling in the short-to-medium term. The construction progress billings would be affected on slower work progress and higher operating expenses related to Covid-19 measure. On the airport concession business segment, we opine that the earnings contribution to remain depressed given the travelling restrictions imposed arising from the ongoing Covid-19 outbreak in the foreseeable term. We also postulate that the long-term outlook of the group’s airport concession business could be threatened by the new Phnom Penh airport by the Chinese, cannibalizing its airport passenger share in the country. Given the depleting order book with limited replenishment prospects, we are downgrading our recommendation on MEB to SELL from previously NEUTRAL.

Source: MIDF Research - 30 Nov 2020