Muhibbah Engineering’s  1H14 core profit of MYR36.6m missed our and consensus estimates  –  at 25%/35%  of both forecasts  respectively. Due to  the  disappointing  1H  results,  we  cut  our  FY14/FY15F  earnings  by 42%/23%  respectively  as  we  incorporate  lower-than-expected orderbook  replenishment.  We  downgrade  our  call  to  NEUTRAL  (from Buy), with a lower SOP-based FV of MYR3.22 (from MYR3.38).

1HFY14 earnings a letdown. Muhibbah Engineering’s (Muhibbah) 1H14revenue  rose  to  MYR860m  (+8.5%  y-o-y),  supported  by  increased deliveries  from  its  cranes  as  well  as  shipyard  divisions.  By  segment, revenue  from  infrastructure  construction  fell  11%  to  MYR503.2m  while that  from  the  cranes and  marine ship  building  and  repair  units  jumped 22.9%  and  18.4%  to  MYR404.9m  and  MYR132.2m  respectively.  Note that  the  effective  tax  rate  was  higher  than  the  statutory  rate  since  the group’s  foreign operating units  did not  receive  tax breaks  and also paid higher taxes. 

Orderbook  at  less than 1x FY13 revenue.  As of 21 Aug, Muhibbah’s orderbook stood  at MYR1.7bn, which  was  lower  than  its  FY13 revenue. We cut our  FY14/FY15  earnings  forecasts  by 42%/43%  respectively as we  believe  Muhibbah  may  face  an  uphill  battle  in  replenishing  its orderbook.  On  the  flip  side,  we  expect  the  company  to  be  a  major beneficiary of the upcoming RAPID project as well as offshore fabrication projects  as  it  holds  a  fabrication  licence  from  Petronas.  Earlier  this month,    Muhibbah announced  that it had accepted  a  letter of  award for the  fabrication,  loadout  and  sea  fastening  of  jackets,  piles  and appurtenances for a central processing platform (CPP) to be installed in the  Tembikai  field.  We  believe  this  may  open  up  a  new  avenue  for Muhibbah to fully utilise its fabrication licence.

Downgrade  to  NEUTRAL,  with  a  lower  FV  of  MYR3.22.  We downgrade Muhibbah to a NEUTRAL  given the lack of earnings visibility due to its diminishing orderbook. Our lower SOP-based FV of MYR3.22 implies an undemanding FY15 P/E of 10.7x.  A potential rerating catalyst is if the company secures  a sizeable contract  in  RAPID or any  offshore fabrication project.

Source: RHB