After taking a closer look at Muhibbah’s Cambodia Airports concession which is reporting double-digit passenger growth, we maintain BUY and lift our TP to MYR3.39 (from MYR2.83, 53% upside) as we revise our valuation method for the airport concession. Other segments are strongly supported by MYR2.1bn worth of orders for infrastructure works, crane manufacturing as well as marine & shipbuilding services.

Strong passenger arrival numbers. Muhibbah Engineering (Muhibbah), via a joint-venture (JV) with Vinci SA (DG EN, NR), owns the concession for three Cambodian international airports in Phnom Penh, Siem Reap and Sihanoukville for 1995-2040. The three airports are reporting strong passenger growth numbers. In 2014, they recorded 5.7m passengers, reflecting a growth of 13% YoY. In annualising the passenger traffic for 2015, we could be seeing an impressive growth of 19% YoY.

Come one, come all. In 2014, the majority of passengers flew in from China (20% of the total passenger traffic), followed by South Korea. Main tourist attractions in Cambodia are its numerous casinos located throughout the country, Angkor Wat which is served by its busiest airport Siem Reap International Airport, and the seaside resort town of Sihanoukville. Notwithstanding recent concerns about the Middle East Respiratory Syndrome (MERS) virus, we believe Cambodia’s tourism industry has a positive long-term outlook.

Other segments doing well. Muhibbah currently has an orderbook of MYR2.1bn coming from its infrastructure division, crane manufacturing, as well as marine and shipbuilding segment. Looking ahead, we believe it may be a beneficiary of the rollout of Refinery and Petrochemical Integrated Development’s (RAPID) petrochemical packages, due to its track record in building infrastructure for petrochemical facilities.

BUY, with TP of MYR3.39. After accounting for our new DCF valuation for it Cambodian airport concession, we derive a new SOP-based TP of MYR3.39. Muhibbah’s earnings growth would stem from its infrastructure, crane and marine & shipbuilding units while the airport concession, which is reporting strong passenger growth numbers, could provide support in terms of associate income.

Cambodian airport concession. Société Concessionnaire de l'Aéroport (SCA), otherwise known as Cambodia Airports, holds the concession to operate three of Cambodia’s international airports. The concession agreement will expire in 2040. Muhibbah, through its 70%-owned Cambodian entity Muhibbah Masteron JV, has a 30% stake in Cambodia Airports. 70% of Cambodia Airports is owned by Vinci SA, a listed French engineering, construction and concession company. Hence, Muhibbah’s effective stake in Cambodia Airports is 21%.

On Vinci SA. Vinci SA is a French listed conglomerate involved in engineering, construction and concessions. Under its engineering and construction division, Vinci has built roads, motorways, rail and light rail systems, energy, oil & gas infrastructure and was one of the 10 contractors for the English Channel tunnel construction. Under its concession segment, Vinci owns more than 4,000 km of motorways in France, and 20 road infrastructure assets around the world – including around 1,000 km of motorways and almost 1,300km of urban roads. The company also owns 23 airports around the world including France, Portugal, and Cambodia.

Airport management. Owing to Vinci’s experience in airport management, the operations of the airport are mostly handled by personnel from Vinci although there is Muhibbah personnel sitting in top management positions – the current CFO, Mr Wong Wai Hong, is from Muhibbah. The current CEO for Cambodia Airports is Mr Emmanuel Menantau, a French national with more than 20 years of experience in the aviation industry. Mr Menantau was appointed CEO of Cambodia Airports in Jul 2011.

How the concession came about. When the government of Cambodia opened up the tender for the privatisation of the country’s airports in 1995, Muhibbah and Vinci teamed up for the bid and were awarded the exclusive rights for the privatisation of all international airports in Cambodia, including Phnom Penh, Siem Reap and Sihanoukville on a build-operate-transfer model. In return for the concession agreement, which lasts until 2040, the consortium had to commit to a programme to enhance the airports to international standards. Sources of income from the airports include passenger taxes, ground handling charges, cargo handling charges, landing fees as well as retail rental fees. The fees and charges are set by the Cambodia State Secretariat of Civil Aviation.

Fees and charges. In 2002, there was a passenger service charge increase in Siem Reap International Airport for international flights to USD15 from USD7. In Phnom Penh, the international passenger service charge was at USD20 while domestic passengers are charged USD15. Currently, the international passenger service charge is USD25 for adults while children are charged USD13. However, service charges for domestic passengers have been decreased to USD6 across all airports. Any upward revision in passenger service charges would increase our valuation of Cambodia Airport. We believe, with the current expansion plans in place, there would not be a downward revision risk for passenger service charges.

Current expansion. In Nov 2013, Cambodia Airports awarded Muhibbah and Vinci contracts to construct, expand and refurbish the terminal buildings of the Phnom Penh and Siem Reap airports. Both projects are on track to be completed by end-2015. The total contracts are worth MYR276m, with Muhibbah’s portion valued at MYR83m. The expansion would include the installation of a new and modern baggage handling system as well as an increase in retail space. Muhibbah guided that the net profit margin for the expansion works is in the range of 2-8%. Future airport extensions. According to Aviation Media’s news report, Vinci Airports’ chairman, Mr Nicolas Notebaert outlined future expansion plans for Cambodia Airports. USD100m will be spent on upgrading Siem Reap International Airport between now and 2020, which will include six new gates as well as a bigger and more efficient check-in area. There are also plans to develop Sihanoukville International Airport into an airport-city type development with USD400m being set aside to build new runways and passenger facilities, as Cambodia’s fledgling tourism industry continues to drive up traffic at Sihanoukville. Since both Vinci and Muhibbah are construction companies with an international track record, we believe that they would be able to deliver on the expansion programmes for the airports.

Phnom Penh International Airport. Cambodia’s main airport is approximately 10km from Phnom Penh, the capital of Cambodia. Apart from being the seat of the central government, the city also has tourist attractions like the Royal Palace, Silver Pagoda, and the Tuol Sleng Museum. Also worth mentioning is the NagaWorld Hotel and Entertainment Complex owned by Nagacorp (3918 HK, NR). The hotel has 700 suites and rooms, with 169 gaming tables and 1,544 electronic gaming machines in operation. Phnom Penh is home to Cambodia’s second busiest airport – in 2014 it ecorded 2.7m passenger movements (+11% YoY).

Siem Reap International Airport. Siem Reap is Cambodia’s busiest airport as it serves as the international gateway to Cambodia’s main tourist attraction, Angkor Wat. The largest religious monument in the world has been a UNESCO World Heritage Centre site since 1993. Siem Reap International Airport recorded 3.0m passenger movements in 2014, an increase of 13% YoY. Sihanoukville International Airport. Sihanoukville is the premier seaside resort destination in Cambodia owing to the number of white sandy beaches and islands surrounding the province. Being a tourist destination, Sihanoukville also has a number of casinos around the province. Named in honour of King Norodom Sihanouk, it was first developed in the 1950s as the location for Cambodia’s first and only deepwater terminal.

Arrival numbers. Cambodian international airports are reporting strong growth numbers. If we annualise passenger numbers, total passengers passing through the three airports would reflect a YoY growth of 19.2%. The seaside town of Sihanoukville would be registering passenger traffic growth of 116%, followed by Siem Reap (21.6%) and Phnom Penh (14.9%). In 2014, 20% of the inbound passengers came from China, followed by South Korea. The risk to our passenger growth assumptions would be potential epidemics such as the recent MERS coronavirus or H1N1, which would trigger travel restrictions between countries. Cambodia is currently on alert after MERS was found in neighbouring Thailand. The Cambodia Daily reported that the Government has implemented screening procedures, and trained staff to be on alert for the virus at entry points into the country. Notwithstanding these health alerts, we believe Cambodia’s tourism industry is still on a positive growth path.

Earnings from the airport concession. For 2014, associate earnings from the airport concessions made up about 26% of consolidated PBT, or MYR38.4m. Note that, the construction earnings from the extension works were recorded in Muhibbah’s infrastructure orderbook. Owing to the strong passenger numbers flying into Cambodia as well as the extension plans currently in place to expand capacity, we expect the associate earnings coming from its airport concession to double in 2020.

Infrastructure, crane and shipbuilding. Muhibbah’s orderbook currently stands at MYR2.1bn, with the crane manufacturing division from Favelle Favco (FFB MK, BUY, TP: MYR3.68) accounting for 50%, followed by the infrastructure construction division at 47% while the rest is made up from its shipbuilding division. Owing to its track record in petrochemical facilities infrastructure construction, Muhibbah stands to benefit from the roll out of RAPID’S petrochemical packages, which we expect to be awarded in 2H15 or early 2016. Apart from RAPID, Muhibbah is also bidding for MRT2 packages. We expect more visibility on MRT2 awards in 2H15.

Valuation. Following our DCF analysis of Cambodia Airports, we derive an enterprise value of MYR3.3bn on the airport concession. This implies an FY15 EV/EBITDA of 12.1x, which is at a discount to its comparable global airport peer average of 13.7x FY15 EV/EBITDA. Muhibbah’s effective 21% stake is, thus, worth MYR690.1m, or MYR1.48 per share. We previously undervalued the associate stake at MYR341.2m, since we did not take into account the strong passenger growth numbers.

As for its core businesses of infrastructure construction, crane manufacturing, marine and shipbuilding, our valuation methodology is unchanged and based on 12x P/E FY15F, ie the average P/E of other construction companies in Malaysia. This is at the higher end of the valuation range of other oil & gas companies in our universe due to its strong position as a Petronas fabrication licence holder as well as its track record which would enable it to capitalise on the rollout of Petronas’ RAPID project. After taking into account our new valuation for the airport concession, our SOP-based TP rises to MYR3.39 (from MYR2.83), representing a 53% upside

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Muhibbah Engineering is a niche global oil & gas and infrastructure specialist involved in the construction, crane manufacturing, shipyard and concession businesses.

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Source: RHB Research - 23 Jun 2015