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  MUHIBAH (5703) MUHIBBAH ENGINEERING (M) BHD - AN UNDERVALUED AIRPORT COMPANY

Background

Muhibbah Engineering (M) Berhad is principally involed in 3 businesses: 1) Construction & engineering, 2) Cranes and automation via 62% owned Favelle Favco, and 3) Airport concessions via 21% owned Cambodia Airports.

The Cambodia Airports business operates for a concession of 45 years, 3 key airports in Cambodia: Phnom Penh, Siem Reap and Sihanoukville.

 

Share price comparison

In 2019, Cambodia Airports passenger traffic grew +10.2%, compared to Malaysia Airports' (MAHB) +6.1% and Airports of Thailand's (AOT)+1.6%.

Yet, Muhibah's share price is only up 18% compared to MAHB's 32% and AOT's 27%. Over the past 12 months, Muhibah is down -64% compared to MAHB's -33% and AOT's -19%. This indicates Muhibah has a lot of catching up to do.

Catalysts

1) The strongest catalyst for the company is the development of an effective vaccine for Covid-19 which will allow global travel to resume. 

It is very likely that in 2021, a number of safe and effective vaccines will be made available to the public. Coupled with extensive testing, air travel is likely to recover strongly. 

2) Even without a vaccine, travel bubbles will be formed soon between Cambodia and China as both countries have very minimal new infection rates .

Besides tourism, China has many business interests in Cambodia such as factories, casinos and hotels in Sihanoukville. The resumption of travel from China is essential as the highest proportion of inbound arrivals in Cambodia are Chinese at 33% in 2018.  

https://www.tourismcambodia.com/img/resources/cambodia_tourism_statistics_2018.pdf

3) Earnings recovery might take place. Even with a large drop in passenger traffic volume and minimal construction activity in 2Q20 due to the MCO, loss before tax was small at only RM8.6m. This is going to recover in 3Q20 as construction activity has resumed.

 

Fair value

Before Covid-19, Muhibah's share price was RM2.30 compared to only RM0.86 now which makes it a huge bargain with limited downside risk. Market capitalisation is a mere RM417m.

In 2019, Muhibah's share of the airport concession business was RM169.7m in PBT.

For simplicity, assuming Muhibah makes less half that amount in 2021 of RM80m PBT and net for Cambodia corporate tax rate of 20%, net profit for airport concession would be RM64m.

Taking a PE multiple of 10x, the Cambodia airports business alone is valued at RM640m or RM1.31, representing 54% upside to current market cap.

If we add in the value of the 62% stake in Favco, that would add RM300m to Muhibah's valuation, equating to RM1.94 per share, and you still get the construction business and other assets for FREE. This translates to a margin of safety of 126%.

Conclusion

This company is a good company to have in your portfolio in the recovery period. The company offers a very high margin of safety, the potential for earnings growth/recovery and minimal downside risk as Covid-19 is already reflected.

https://klse.i3investor.com/blogs/buyandholdlt/2020-11-16-story-h1536437889-AN_UNDERVALUED_AIRPORT_COMPANY.jsp

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