We visited two airports in Cambodia – Phnom Penh International and Siem Reap International – which were recently expanded to double theircapacity to a combined total of 12m ppa. We believe Cambodia Airports isa great asset for Muhibbah and also provides it with a footprint in the high growth region of Indochina. We continue to like Muhibbah as a beneficiary of the RAPID project while its airport concessions generate a stable cash flow. Maintain BUY with a MYR3.34 TP (35% upside).Cambodia Airports. Muhibbah Engineering (Muhibbah) hosted a group of analysts and fund managers to Cambodia for the 20th annivesary of Cambodia Airports, a joint venture (JV) it has with Vinci SA (Vinci). The visit also coincided with the completion of the airport extensions, which saw Cambodia Airports doubling its passenger capacity to 12m passengers per annum (ppa).

Cambodia Airports charted double-digit growth in its FY15 passenger traffic, marking its sixth consecutive year of such growth. It was driven by its two main international airports – Phnom Penh and Siem Reap. According to the Ministry of Tourism, approximately 95% of visitors to Cambodia are leisure travellers. Sihanoukville Airport was recently upgraded to an international airport, owing to the province’s popularity as the premier beach and resort destination; it saw passenger growth of 118% YoY in 2015. We are expecting Cambodia Airports to register double digit annual growth in passenger traffic until 2020 and estimate contribution from Cambodia Airports to make up 39% of Muhibbah’s PBT in FY16.

Beneficiary of RAPID The refinery and integrated petrochemicals development (RAPID) is expected to come online in 2019 and thus we forecast peak capex spending for the project to kick in from the end-FY17 to FY18. RAPID projects make up an estimated one-third of Muhibbah’s current tenderbook of MYR5bn, while the rest of the tenders comprise infrastructure construction and marine infrastructure projects. We estimate Muhibbah to win MYR600m and MYR800mworth of projects in FY17 and FY18 across all three segments and believe our expectations are conservative, considering the timing of RAPID’s peak capex spending.

Maintain BUY with MYR3.34 TP. We continue to like Muhibbah, as its exposure to RAPID would provide a potential earnings upside with stable cash flows coming from its Cambodia Airports concessions. We maintain our BUY recommendation with a SOP-derived TP of MYR3.34. Risks and forecasts. Lower-than-expected orderbook replenishment, slower passenger growth for its airports. No change to our forecasts.

Stake in Cambodia Airports. Cambodia Airports holds the concession to operate three international airports in Cambodia: Phnom Penh, Siem Reap and Sihanoukville and the concession expires in 2040. Muhibbah has a 21% effective stake in the airport concessions, while 70% is held by Vinci, a listed French engineering, construction and concession company. The consortium recently expanded two of the airports to double their total combined capacity to 12m ppa (from 6m ppa). 2016 also marks the 20thanniversary of Cambodia Airports, which is now under the new consortium.

Siem Reap International Airport. We landed in Siem Reap International after a two-hour flight from KLIA2. Since it was still early morning, the airport was not as yet busy and itgave us ample opportunity to walk around. The peak season for this airport is from November to March, when the weather is much more forgiving. We arrived in the middle of March, which is at the tail end of the peak season and the sun was not as friendly. The main extension of the airport is where the current works are focused on the façade and beautification of the terminals. There were plenty of sculptures and artwork depicting the history of Cambodia, especially the numerous temples around the area. CambodiaAirports employed the help of Artisans Angkor, a Cambodian organisation, which engages rural Cambodians to preserve, develop and promote Khmer arts.

Angkor Wat the famous temple complex of Cambodia is located only 4km away from the airport. We went on an excursion to the temple complex in the afternoon, when the temperature was around 37 degrees Celsius. We visited three temples – Bayon Temple, Ta Prohm (better known as the Tomb Raider temple) and of course Angkor Wat. The temples were magnificent and we got to see the sun set over Angkor Wat.

To Phnom Penh. On the second day, we headed to Phnom Penh on Bassaka Air, a Cambodian commercial airline which only plies between Phnom Penh and Siem Reap. The airline also flies in VIP junkets from Phnom Penh and China. We arrived at 11:30am and the airport was thronged with people. As the capital of Cambodia, passengers to hnom Penh are typically there on business. On the other hand, Siem Reap’s passengers were mostly tourists. We attended a gala dinner to celebrate the 20thanniversary of Cambodia Airports, which was attended by the Deputy Prime Minister of Cambodia, Dr Sok An, as well as Vinci and Muhibbah’s management. The next day, the Prime Minister of Cambodia, Mr Hun Sen inaugurated the Phnom Penh and Siem Reap airport extensions at an official ceremony held at the Phnom Penh International airport.

Cambodia Airports charted double-digit growth in its FY15 passenger traffic,marking its sixth consecutive year of such growth. It was driven by its two main international airports ie Phnom Penh and Siem Reap. According to the Ministry of Tourism Cambodia, approximately 95% of visitors to Cambodia are leisure travellers. Phnom Penh is the capital and largest city in Cambodia and has various casinos, while Siem Reap is located near Angkor Wat, a UNESCO World Heritage site. Sihanoukville Airport was recently upgraded to an international airport, owing to the province’s popularity as the premier beach and resort destination in Cambodia.

It saw passenger growth of 118% YoY in 2015. We are still expecting Cambodia Airports to register double digit growth in terms of passenger movement until 2020.Surge in Chinese tourist arrivals. Vietnam is the largest market for Cambodia, being its next door neighbour followed by China and South Korea. Chinese tourist numbers have risen sharply to 629,786 as at Nov 2015, from only 128,000 in 2009. The Ministry of Tourism Cambodia has yet to release the full-year numbers for 2015 (traffic numbers are only until Nov 2015). Figure 2 shows the top 10 tourist arrivals to Cambodia. While we were in Cambodia, we noticed the business newspapers were in Chinese and the magazines at the airport lounge were in Korean.

Entry into Indochina. Cambodia Airports is a great asset for Muhibbah, the recent extensions would enable the international airports to bring in more airlines to Cambodia and in turn, increase passenger numbers. Having a presence in Cambodia would also enable Muhibbah to look for infrastructure projects around the high growth Indochina region.

Peak capex for RAPID in 2017-2018. With the refinery and integrated petrochemicals development (RAPID) expected to be online in 2019, we expect peak capex spending for the project to come in 2017-2018. Muhibbah is now able to bid for jobs directly, as it is now a main contractor for the project. Going forward, we expect it to continue to win more RAPID contracts. RAPID projects make up an estimated one-third of Muhibbah’s current tenderbook of MYR5bn, while the rest of the tenders are infrastructure construction and marine infrastructure projects. We expect Muhibbah to win MYR600m and MYR800m worth of projects in FY17-18 across all three segments. We believe our expectations are conservative, considering RAPID’s peak capex spending is expected to kick in from endFY17 to FY18.

Maintain BUY with MYR3.34 TP. We estimate the contribution from its airport concessions to make up 39% of Muhibbah’s PBT in FY16. We still expect the airports to chart double-digit passenger growth in the next three years, as their expansion plans bear fruit. Going forward, we expect Muhibbah to continue win ning jobs from RAPID, on the back of its track record in the oil & gas and petrochemical infrastructure segments. We make no changes to our earnings forecast. Maintain BUY with a SOP-based TP of MYR3.34. For the airport concessions, our WACC assumption is 12%, with a FCF 5-year CAGR of 31%.

Source: RHB Research - 25 Mar 2016