Muhibbah Engineering (M) Bhd
(April 8, RM2.35)
Maintain buy with a target price (TP) of RM3.05: Based on our assessment of packages awarded by Petroliam Nasional Bhd to various main contractors in 2014, we reckon that the influx of project sub-awards in the Refinery and Petrochemical Integrated Development (Rapid) will hit the tipping point and accelerate in the financial year ending Dec 31, 2016 (FY16), as the commission date of 2019 is impending.
Construction of core infrastructure for refinery processes, such as crude distillation and kerosene hydro-treatment, should take place in the near term for Rapid to start commissioning within targets.
We believe Muhibbah Engineering (M) Bhd’s sufficient working capital and retained earnings allow it to undertake a few Rapid-related projects simultaneously. Its working capital and retained earnings have grown to 40% and 32% respectively over the past six years.
This illustrates ample financial headroom to expand and undertake subcontracting roles from the five main contractors despite incurring additional costs, such as mobilisation fees and performance bonds.
We view that Muhibbah will be the front runner to secure hydro-treatment and distillation infrastructure subcontract packages in the structural construction segment. Despite the capital intensity for executing projects as a subcontractor, we are not estimating any significant exposure to margin erosion. This is due to Muhibbah’s diversified earnings profile, which is well supported. For example, operating income from its airport concessions in Cambodia grows at a rate of 44%. Having said that, we reiterate our earnings estimates for FY16 estimate (FY16E) and FY17E.
We maintain our “buy” recommendation with a TP of RM3.05 based on our sum-of-parts valuation. Muhibbah’s share price is trading at an undemanding implied price-earnings ratio of 9.5 times, below its peers’ median of 15.7 times.
Muhibbah’s current enterprise value/earnings before interest, taxes, depreciation and amortisation of 12.2 times is below its peers’ median of 13.9 times, implying an attractive discount. — MIDF Research, April 8
MUHIBAH (5703) - Muhibbah seen undertaking a few Rapid-related projects
http://www.theedgemarkets.com/my/article/muhibbah-seen-undertaking-few-rapid-related-projects
