MUHIBAH (5703) - Muhibbah Engineering - More bullish than ever
Target RM3.11 (Stock Rating: ADD)
Muhibbah Engineering participated in CIMB's Invest Malaysia conference. The improved visibility for its RM4bn total jobs in tender suggests that its infra segment is heading to an all-time high order book. Management guided for margin expansion only from FY16 onwards but also reiterated the strong earnings support from its US$ exposure in FY15. The group's arguably unique positioning in the downstream oil & gas and marine infra segments could translate to higher job success rates. We think that sector newsflow should bode well for Muhibbah in 2H15. We keep our EPS forecasts, target price basis of a 30% discount to RNAV and Add call, with job wins and recovery of foreign shareholding as catalysts. Muhibbah remains our small/mid-cap pick.
What Happened
Group Finance Director Shirleen Lee talked about the group's prospects to over 40 fund managers and analysts during the large track session at our Invest Malaysia conference today. The key points include: 1) Muhibbah's growth area is becoming more predominant within the domestic downstream oil & gas and marine infra segments. 2) More subcontract works from the refineries in Rapid are in the pipeline, with up to RM1bn total targeted jobs. 3) The total tender book of RM4bn includes port expansion jobs, MRT 2 and highways. 4) Margins are likely to expand starting in FY16, led by specialised projects and completion of low-margin infra work. 5) Following the oil price crash-driven selldown in late 2H14, foreign shareholding has slid to c.11% from over 20% previously.
What We Think
We came away feeling more bullish about the group's outlook. Management's guidance of c.RM145bn of total available domestic jobs for the sector was not a big surprise but it clearly explains why being selective in tenders is the best strategy for a specialised contractor like Muhibbah. Competition in the downstream oil & gas and marine infra segments is much less intense, which continues to be positive for Muhibbah, backed by its steel fabrication licence from Petronas. Negotiations and tenders on subsequent subcontract packages in Rapid are ongoing and we expect good newsflow in 2H15. This is on top of the MRT 2, new highway subcontract works and potential port expansion jobs in late 2015 and going into 2016.
What You Should Do
Accumulate. We expect strong re-rating potential in 2H15. The stock remains the cheapest in our construction universe, trading at 10% FY16 P/E vs. the sector average of 15x. Foreign-shareholding rebound is a potential catalyst too.
Source: CIMB Daybreak - 24 April 2015
Target RM3.11 (Stock Rating: ADD)
Muhibbah Engineering participated in CIMB's Invest Malaysia conference. The improved visibility for its RM4bn total jobs in tender suggests that its infra segment is heading to an all-time high order book. Management guided for margin expansion only from FY16 onwards but also reiterated the strong earnings support from its US$ exposure in FY15. The group's arguably unique positioning in the downstream oil & gas and marine infra segments could translate to higher job success rates. We think that sector newsflow should bode well for Muhibbah in 2H15. We keep our EPS forecasts, target price basis of a 30% discount to RNAV and Add call, with job wins and recovery of foreign shareholding as catalysts. Muhibbah remains our small/mid-cap pick.
What Happened
Group Finance Director Shirleen Lee talked about the group's prospects to over 40 fund managers and analysts during the large track session at our Invest Malaysia conference today. The key points include: 1) Muhibbah's growth area is becoming more predominant within the domestic downstream oil & gas and marine infra segments. 2) More subcontract works from the refineries in Rapid are in the pipeline, with up to RM1bn total targeted jobs. 3) The total tender book of RM4bn includes port expansion jobs, MRT 2 and highways. 4) Margins are likely to expand starting in FY16, led by specialised projects and completion of low-margin infra work. 5) Following the oil price crash-driven selldown in late 2H14, foreign shareholding has slid to c.11% from over 20% previously.
What We Think
We came away feeling more bullish about the group's outlook. Management's guidance of c.RM145bn of total available domestic jobs for the sector was not a big surprise but it clearly explains why being selective in tenders is the best strategy for a specialised contractor like Muhibbah. Competition in the downstream oil & gas and marine infra segments is much less intense, which continues to be positive for Muhibbah, backed by its steel fabrication licence from Petronas. Negotiations and tenders on subsequent subcontract packages in Rapid are ongoing and we expect good newsflow in 2H15. This is on top of the MRT 2, new highway subcontract works and potential port expansion jobs in late 2015 and going into 2016.
What You Should Do
Accumulate. We expect strong re-rating potential in 2H15. The stock remains the cheapest in our construction universe, trading at 10% FY16 P/E vs. the sector average of 15x. Foreign-shareholding rebound is a potential catalyst too.
Source: CIMB Daybreak - 24 April 2015
