Stronger earnings and job flow outlook for Muhibbah in 2017

KUALA LUMPUR: CIMB Equities Research is upbeat about Muhibbah Engineering’s prospects for FY17 due to stronger earnings and job flow outlook.

It said on Wednesday Muhibbah’s FY16 core net profit was in line, at 100% of its forecast and 102% of Bloomberg consensus.

The infrastructure division chalked up a strong performance, driven by higher-margin jobs. The Cambodian airport concessions were boosted by US$ gains, offsetting the decline in crane earnings.

Commenting on the FY16 financial performance, it said Muhibbah’s full-year core net profit was at 100% of its forecast and 2% above Bloomberg consensus.

“Infra segment revenue advanced 58% on-year on the back of a stronger order book. We see upside to the 5% pretax margin achieved in FY16 as new jobs flow through in FY17, with additional upside from potential realisation of variation order (VO) claims. 

“The decline in crane earnings was not a surprise, and offset by the strong 46% surge in airport concessions. The 5.5 sen first and final DPS was in line,” it noted.

CIMB Research said with the recent Qatar job win, Muhibbah’s outstanding order book jumped to RM1.7bil (including cranes and shipyard). Tender outlook remains good, with RM5bil addressable tenders, almost double 2016’s figure and comprise largely infrastructure contracts. 

“There is a good chance that our assumed RM800mil total wins for infra in FY17 can be exceeded,” it said.

The research house said Muhibbah had also prequalified for the remaining two Mass Rapid Transit 2 packages. Clinching these would be a bonus.

It also pointed out that apart from public transport, port and marine infrastructure is an underappreciated segment of the sector where Muhibbah is a major player, having completed/currently undertaking jobs for Westports, Northport and the Port of Tanjung Pelepas (PTP). 

The RM12.5bil Kuala Linggi International Port (KLIP) in Melaka and the multi-billion ringgit Carey Island port terminal in Pulau Indah are recent key examples of how port capacity expansion and greenfield port/marine-type projects add to the group's job growth.

“In our view, 1H17 could be a period of good newsflow as it continues to actively tender for infra and marine jobs, locally and overseas. 

“Our TP (RM3.09), still pegged to 30% discount to RNAV, rises as we update balance sheet items and Favelle Favco’s higher market cap.

“Key catalysts are job flows. At nine to 11 times CY17-18F price-to-earnings, its valuation remains attractive versus the construction average of 14 to 15 times. 

“Muhibbah remains our preferred small/mid-cap pick. Downside risks are lower-than-targeted order wins and weaker outlook for cranes,” it said.