Quick take: Muhibbah Engineering JV left in the lurch

View of Bintulu Port

KUALA LUMPUR: Muhibbah Engineering (M) Bhd's joint venture which undertook the RM584.5mil contract to build a supply base wharf at Bintulu Port in Sarawak is now left in the lurch after the project was terminated last week.

However, the engineering services company has been cautious in its request for compensation from Bintulu Port Authority which axed the April 2017 contract, though its expressed some hope. 

The termination has come as a surprise to the market as the project was to have been completed by the end of 2019.

On Jan 17, Muhibbah announced to Bursa Malaysia the JV had received a notice about the termination of the contract. There were no reasons given why the contract was axed at the current stage which analysts estimated to be nearly half of the total works.

In the follow-up statement on Tuesday, Muhibbah said the company and its joint-venture partner, Viccana, “is of the view that Bintulu Port Authority will grant fair compensation to the JV”.

Muhibbah has a 51% equity interest in the Muhibbah Viccana JV to build the wharf and associated works.

The Bintulu Port Authority is responsible in ensuring that port operations by the private sector is carried out smoothly.  It is also tasked to ensure all port users received quality services on par with other major ports in the region. 

Kenanga Investment Research estimated with the contract value at RM584.8mil, with Muhibbah’s share of works carried a value worth RM400mil. 

“Our rough estimate arrived to a progress work at around 45%-50%. That leaves the contract’s current unbilled value at range of RM200mil to RM220mil, or circa 9.7% of Muhibbah’s RM2.1bil
outstanding orderbook,” said the research house.

Based on the Tuesday's announcement, Muhibbah said it was “ascertaining the financial and operational impact and compiling the relevant claims as a result of this termination for discussion with Bintulu Port Authority”.

After the negative news, Nomura still had a Buy call on Muhibbah with a target price of RM4.37 while KAF Seagroatt has a Hold at TP of only RM3.03. Kenanga Research has an Outperform with a TP of RM3.20; DBS Bank a Buy call with a TP of RM3.55.

Earlier this month, RAM Ratings reaffirmed the AA1/Stable/P1 corporate credit ratings of Bintulu Port Holdings Bhd (BPHB) - which operates the port -- given its function as a key import and export gateway in Sarawak and in Malaysia.

Bintulu Port operates the nation’s only liquefied natural gas (LNG) export terminal, which serves Petroliam Nasional Bhd’s LNG liquefaction plants. LNG remained the primary cargo item handled at Bintulu Port.

In the first nine months of the financial year 2017 (9MFY17), RAM Ratings noted that LNG throughput surged 10.3% year-on-year to 19.98 million tonnes (compared with 18.11 million tonnes in 9MFY16) due to strong demand from China and additional capacity from Petronas’s new LNG Train 9.

“However, as global LNG supply has risen subsequent to new LNG plants becoming operational in Australia and the US, we maintain our conservative stance in expecting the average volume of growth in LNG at Bintulu Port to remain in the single digits over the next few years,” it added.

Meanwhile, non-LNG throughput growth at Bintulu Port has been largely supported by increased palm oil throughput and rising raw material imports by Samalaju Industrial Park (SIP) users in 9MFY17, it said.