Ongoing strong earnings delivery seen as key catalyst for Muhibbah

TheEdge Tue, Feb 12, 2019 10:18am - 5 years View Original


Muhibbah Engineering (M) Bhd
(Feb 11, RM2.85)
Maintain buy at an unchanged target price (TP) of RM3.55.
With a fast-growing airport concession business contributing now 70% of its bottom line and 80% of its crane business still coming from overseas markets, Muhibbah Engineering (M) Bhd is becoming less of a domestic infrastructure company. Still, its construction business is unique, being involved in three core areas: i) civil engineering; ii) marine-based construction; and iii) offshore and onshore fabrication works, where its Petronas licence offers an advantage.

 
Our TP is at the higher end of the consensus range as we believe the market has yet to fully appreciate its unique business model that is underpinned by its varied construction expertise and strong recurring income. We conservatively estimate its 21% stake in the Cambodia airport concession to be worth RM734 million (discounted cash flow [DCF], weighted average cost of capital [WACC] 10% and average passenger traffic growth of 5.9% per annum [pa] until 2040), which is already about half of the stock’s market capitalisation. Revenues are also denominated in US dollars.

We expect ongoing strong earnings delivery, which will largely come from stronger growth for its Cambodian airport concession, to be a key catalyst. Also, potential synergies from the acquisition of industrial automation companies for its crane, construction and concession business could provide another leg of growth. A pickup in oil and gas activities could see a rebound in demand for Muhibbah unit Favelle Favco Bhd’s offshore cranes.

Muhibbah is a ‘buy” with a sum-of-parts (SoP)-derived TP of RM3.55. We value the stock based on SoP as we think this better reflects its diversified business while also capturing its cash-generating Cambodian concession.

Delays in project flows and sudden spikes in raw material costs could dampen its earnings outlook. — AllianceDBS Research, Feb 11

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