We  initiate  coverage  on  Muhibbah  with  a  BUY  call  and  SOP-based MYR3.35  FV.  The  group  has  become  more  O&G-centric  following  the awarding  of  an  onshore fabrication license by Petronas. We believe it will  be  one  of  the  beneficiaries  of  the  RAPID  project.  We  forecast earnings  to  grow  at  a  three-year  CAGR  of  24.5%  on  the  back  of  a healthy orderbook from Muhibbah’s construction and crane division.

• Background.  Largely  an  infrastructure  construction  group,  Muhibbah Engineering (Muhibbah)’s operations include:  i) crane manufacturing via a  61.8%-owned  subsidiary,  Favelle  Favco  (FFB  MK,  NEUTRAL,  FV: MYR3.70), ii) shipbuilding and services,  and iii) airports and federal road management concession.
• Look  past  the  Asia  Petroleum  Hub  (APH).  Management  has  fully provided for the APH project that failed to take off in 2009. Muhibbah has recognised MYR400m  in total  as  at  FY12 and is cautious  on  any writeback in the future.
• Getting more oil & gas (O&G)-centric.  With the award of the offshore facilities  construction  –  major onshore fabrication  (MOF)  license in June 2013,  we  believe  it  opens  up  doors  for  Muhibbah  to  bid  for  onshore fabrication works directly rather than being sub-contracted or through a consortium.
• A new chapter.  From the aftermath of  the  APH and the last provision being fully provided for in FY12, we believe earnings are set to grow by a 3-year  CAGR  of  24.5%  on:  i)  major  onshore  fabrication  works  and infrastructure  construction  opportunities  in  both  the  domestic  and international  markets,  ii)  healthy  demand  for  offshore  cranes ,  and  iii) offshore support vessel (OSV) renewal.
• Initiate  with  BUY,  SOP-based  MYR3.35  FV.  We  initiate  coverage  on Muhibbah  with  a  BUY  call.  Our  SOP-based  MYR3.35  FV  is  based  on target FY14 P/Es  of  10x on its infrastructure construction segment, 11x to its crane manufacturing business and 11x to its shipbuilding division. The concession segment is valued via DCF and is worth an estimated MYR0.80/share.  Upside  risk  include:  i)  its  federal  road  maintenance concession  being  extended  another  10  years,  and  ii)  garnering  more infrastructure construction contracts, exceeding our MYR3bn  estimate.

Corporate Background

Four  major  business  segments:  i) infrastructure  construction,  ii)  crane manufacturing,  iii)  shipbuilding,  and  iv) concession  rights  to  manage  and  maintain airports  in  Cambodia  and  federal  roads  in four states in Malaysia

The jack of all trades. Muhibbah was established in 1972 by Mac Ngan Boon. It was listed  on  Bursa  Malaysia  22  years  later  and  has  grown  into  a  major  infrastructure construction group in Malaysia.

Muhibbah’s  infrastructure  construction  division  provides  engineering,  procurement,construction  and  commissioning  (EPCC)  capabilities  for:  i)  liquefied  natural  gas (LNG) jetties,  ii)  oil terminals,  iii)  oil storage tanks,  iv) laying  gas pipes,  v)  bunkering facilities,  vi)  ports,  vii)  bridges,  viii)  dams,  ix)  marine  facilities,  and  x)  infrastructure works.

The  group  holds  a  61.8%  stake  in  Favelle  Favco,  a  crane  manufacturer  that constructs offshore pedestal cranes for the O&G exploration and production (E&P) industry as well as the onshore construction market.

Through its wholly-owned subsidiary, Muhibbah operates a shipyard that constructs various types of offshore support vessels (OSVs) such as anchor handling tug boats (AHTS)  and supply vessels. It also offers ship maintenance services for  the  offshore O&G industry.

Muhibbah’s  concession  division  generates  revenue  through  its  right  to  receive income  from  managing  two  international  airports  and  one  domestic  airports  in Cambodia as well as federal road maintenance concessions in four Malaysian states.

Corporate Milestones

Muhibbah’s  legacy  spans  across  an impressive 42 years since its establishment in 1972

Establishing  a  presence  since  1972.  Muhibbah  was  incorporated  in  1972  as  a marine  construction  specialist  in  Malaysia.  It  subsequently  established  itself  as  an international  O&G  and marine engineering  player and was listed on Bursa Malaysia in 1994.

Crane  manufacturer with  a niche.  Muhibbah  ventured beyond  Malaysia  when  its acquired Favelle Favco Cranes in 1995.  The group  proceeded to set up a facility in the  US,  ie  Harlingen  Port,  Texas,  in  1996.  It  further  established  itself  in  the  crane manufacturing industry when it acquired Kroll in 1997. The latter  specialises in allelectric  hammerhead  cranes,  including  pedestal,  ship,  wharf  and  special  purposed variants. Both crane manufacturer have their respective niche and are not competing head-to-head on with each other. Muhibbah  ventured into the shipbuilding and repair services segment in 1996 and now owns a shipyard in Port Klang, Selangor.

Concession rights to airports in Cambodia.  A successful partnership with Francebased Vinci Construction provided Muhibbah with an inroad into Cambodia. It has the concession  rights  to  manage  three  Cambodian  airports  through  a  21%  stake  in Societe  Concessionnaire  de  L’Aeroport  (SCA)  since  2001.  That  same  year,Muhibbah’s 21% associate Roadcare (M) SB was granted a 15-year concession to maintain federal roads in four states in Malaysia. The  group  was  recently  awarded  the  license  to  construct  offshore  facilities  by Petronas

Shareholder Composition
Shareholder  composition  remains  intact.  Muhibbah  remains  tightly  held  by  the same  group  of  shareholders, ie  co-founder  Mac  and  Malaysian  Government-linked funds  Lembaga Tabung Haji (LTH)  and  the  Employees Provident Fund (EPF),  as of four years ago. Back then, all three held approximately 41.8%  collectively. Currently, the three parties hold approximately 36.0%.

Source: RHB/servlets/staticfile/236477.jsp