KUALA LUMPUR: CIMB Research has maintained its “add” call on Muhibbah Engineering Bhd (MEB) and its valuations remain attractive compared with its peers.
“We continue to like Muhibbah as it offers a unique exposure to the marine/port infra segment with over 40 years of experience and track record.
“It trades at an undemanding CY17-18 price-earnings ratio (P/E) of 10-12 times versus the construction sector average P/E of 15 times,” CIMB said.
“Muhibbah remains our preferred small/mid-cap pick. Our target price remains pegged to a 30% RNAV discount,” it added.
CIMB said key catalysts for Muhibbah included greater momentum of contract wins in 2H17, potentially strong 1Q17 results performance driven by substantial variation orders (VO) claims and potential new M&A angle for subsidiary Favelle Favco that would add new recurring earnings.
Muhibbah secured its second infra contract year-to-date; infra order book rises by 18% to an estimated RM1.7bil.
This is the second major win for the group in 2017.
Early this year, the group secured a RM438mil infra contract in Qatar, relating to the construction of roads and infrastructure works at the Um Alhoul Economic Zone (QEZ-3) Phase 2.1 (Portion 2A, Marine Cluster).
“With this new contract in Bintulu and based on the group’s 51% JV share, this brings the total value of wins this year to RM736mil our assumption of RM800mil for the full year,” CIMB said.
The research house said the latest award raised Muhibbah’s infra order book (excluding cranes and shipyards) by 18% to RM1.7bil.
CIMB expects pretax margins to be higher than the industry’s average open tender infra margin of 5-6% as this is a relatively specialised contract.
“Assuming a pre-tax margin of 8-9%, the job would contribute 5-8% to FY17-19 EPS forecasts.
“Though our forecasts are retained (as the award forms part of our win assumption), this new contract is expected to underpin an improvement in infra margins from the 5% pretax margin achieved in FY16,” it said.
The group aims to secure as much as circa RM1bil worth of new contracts in FY17 against its current tender book of RM3bil.
“Our sensitivity analysis suggests that increasing our order win assumption for FY17 by 25% to RM1bil would raise FY18-19 EPS forecast by 4-6% and target price by circa 3%; this does not include additional positive impact from approved VO claims of rica RM600mil likely to flow through from 1QFY17,” CIMB said.
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