• We see a likely positive outcome for the PP concession, which could include compensation and a new operating agreement for the new airport in Kandal.

• We believe earnings will pick up in FY24-25F while FY25F P/E is just 10x.

• Reiterate Add and SOP-derived TP of RM1.34.

Cambodia airport quandary leaning towards best-case scenario

We had a meeting with Muhibbah on 15 Apr and came away feeling more positive that its Phnom Penh airport concession (PP) will see a favourable outcome. We highlighted in our report in Feb 24 (link) that, although its Siam Reap airport was surrendered to the Cambodian government in Oct 23, a new international airport in Phnom Penh known as Techo International Airport, located in Kandal, is currently in construction and scheduled to start operations in 1H25F, according to Cambodia’s State Secretariat of Civil Aviation (SSCA); we believe this will replace the current Phnom Penh International Airport operated by Muhibbah. Muhibbah said negotiations with the authorities are progressing well and the most ideal scenario we had posited may actually come to fruition, i.e. Muhibbah receives compensation for the loss of its existing operations of Phnom Penh airport (likely at BV) and be engaged to operate the new airport at Kandal. This is because the new airport is being built by a JV between SSCA and the Overseas Cambodia Investment Corporation (OCIC), which is owned by a local businessman, both of whom do not have the expertise to run an airport. An article in the Khmer Times published in Mar 24 also stated that a favourable result is expected, based on the Royal Government’s win-win policy. However, details are sparse presently.

Stronger recovery in associate profits led by Cambodian airports

Muhibbah now owns a 21% effective stake in Cambodia Airports, which manages two operating airports in Cambodia (PP and Sihanoukville). 4Q23 associate profit contribution was RM27m (vs. 3Q23’s RM14m, 2Q23’s RM8m), coming largely from its Cambodia airport concession, which also benefited from a 20% increase in passenger service charge for all three airports in Cambodia (PP, Sihanoukville and Siam Reap) in Sep/Oct 23. The three airports in Cambodia clocked 4.8m passenger arrivals in 2023, up 102% yoy, said Muhibbah, while 4Q23 passenger arrivals rose 16% yoy to 1.1m (2019: 11.6m).

Reiterate Add; better earnings likely in FY24-25F

Muhibbah’s 4Q23 included one-offs of c.RM66m, the largest of which was a RM40m provision for long outstanding claims. We expect better earnings delivery in FY24-25F, anchored by its RM2.2bn orderbook as at Feb 24 (Fig 5) and gradual recovery for its Cambodia airport concessions while activity at its shipyard has also picked up. Its construction division made RM17m in 4Q23 pretax profit (RM8m in 3Q23) and it continues to bid for more Petronas contracts, leveraging on its Petronas fabrication licence. 4Q23 pretax profit for its crane business rose 56% qoq to RM31m. We like Muhibbah as a proxy for a recovery in tourist arrivals with its Cambodian airport concessions while its marine expertise and Petronas fabrication licence should enable it to clinch more Petronas jobs. Key downside risks are patchy execution track record and higher raw material costs. Re- rating catalysts include better earnings delivery and stronger tourist arrivals in Cambodia.

Source: CGS-CIMB Research - 16 Apr 2024