Muhibbah Engineering (M) Bhd (Jan 11, RM2.39)
Maintain add call with target price (TP) of RM2.86: 49%-owned Muhibbah Engineering Middle East LLC has won a contract from the Economic Zones Company of Qatar (Manateq) to undertake the construction of roads and infrastructure works at Um Alhoul Economic Zone (QEZ-3) Phase 2.1 for a total contract sum of RM438.1 million. Manateq is the leading developer and operator of specialised economic zones, logistics parks and warehousing parks in Qatar. Project completion is set for mid-second quarter (2QFY2018).
This contract win increases the total (infra, cranes and shipyard) outstanding order book by 26% to RM2.2 billion, as it bumps up the infra segment’s order book to RM1.4 billion. For the other divisions, cranes’ (Favelle Favco) order book is RM698 million, while shipyard’s stands at just RM48 million. As the RM438 million higher-margin new job forms part of our RM800 million assumed job wins for forecast FY2017 (FY2017F), we retain our earnings per share (EPS) FY2016-FY2018 EPS forecasts but highlight a fairly good chance of the group beating our order win assumptions this year.
During the small group meetings at our Malaysian Corporate Day event last week, management sounded more upbeat than before about its job replenishment outlook in 2017. We think investors should not underestimate the prospects of its marine/infra segment (the group’s niche area) that could make a comeback this year. After securing four packages worth almost RM1 billion from Petronas’ refinery and petrochemical integrated development project in Johor, the group has turned less upbeat about tender prospects there due to the more competitive landscape.
Following this contract win, management clarified that its tender book this year amounts to as much as RM5 billion, almost double 2015’s figure by our estimates, and comprises largely infrastructure contracts. Also, 40% (RM2 billion) of the RM5 billion total value of jobs in tender comprises those related to marine infrastructure which is the group’s niche area.
We understand that the remaining 40% are domestic and overseas infra contracts, including one potential southern portal package for mass rapid transit (MRT) Line 2.
In our view, first half (1H) of FY2017 could be a period of good news flow as the group continues to actively tender for infrastructure and marine jobs, both locally and overseas. We would not discount the group securing more packages in QEZ-3. Our TP is still pegged at a 30% revalued net asset valuation discount.
Key catalysts are job flows. At nine to 10 times CY2017-CY2018 price-to-earnings ratio, its valuation remains attractive versus our construction average of 14 to 15 times. Muhibbah remains our preferred small/mid-cap pick. Downside risk is lower-than-targeted order wins. — CIMB Investment Research, Jan 10
This article first appeared in The Edge Financial Daily, on Jan 12, 2017. Subscribe to The Edge Financial Daily here.