Muhibbah getting its mojo back

by **Cals** Mon 22 Jul 2013, 11:05

Muhibbah getting its mojo back
Business & Markets 2013
Written by CIMB Research
Monday, 22 July 2013 10:39

[b style="line-height: 18px;"]MUHIBBAH ENGINEERING (M) BHD [] [/b]
(July 19, RM2.53)
Maintain outperform at RM2.49 with a revised target price of RM3.18 (from RM1.83): As highlighted in our post-roadshow note, Muhibbah offers the most attractive turnaround prospect among the smaller cap contractors. Prospects are being spurred by oil and gas (O&G) infrastructure, marine/port-related work and a fabrication licence from Petroliam Nasional Bhd (Petronas).

We raise our revised net asset value (RNAV) to capture the surge in Favelle Favco’s market cap and a lower weighted average cost of capital of 7% (from 8%) for its airport concessions. We further cut our RNAV discount to 30% from 40% to reflect investors’ rising appetite for smaller caps, its O&G exposure and its order book recovery, which raises our target price. Maintain “outperform”. Catalysts are job wins in the second half of 2013 (2H13) and new recurring income assets.

The stock has surged 51% since we promoted it during our sector roadshow in early July. Year-to-date (YTD), it has emerged as the best performing smaller cap stock under our coverage (+216% YTD). After the wrath over the Asia Petroleum Hub Sdn Bhd (APH) issue and a RM245 million writedown taken in the fourth quarter (4Q) of 2012, its turnaround had started with the award of a Petronas offshore fabrication licence. This could put the company in the running for an initial RM600 million to RM900 million worth of work. The group has been prequalified for three work packages for Petronas’ refinery and petrochemical integrated development project. Overseas, it hopes to add recurring income streams, by tendering for airport concessions in Myanmar. We are optimistic on its chances.
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After APH, Muhibbah now offers a strong turnaround prospect on the back of domestic O&G exploration and production. This does not include potential mass rapid transit wins over the longer term. Its order book for all divisions, including cranes and shipyard, is improving. In our recent roadshow, we sensed that foreign investor interest is returning.

Accumulate. Valuations do not look stretched as there is upside to numbers, in our view. Our earnings per share forecasts are 14% to 19% below consensus. We could revise them once job momentum picks up, expected in 4Q13. — CIMB Research, July 19

This article first appeared in The Edge Financial Daily, on July 22, 2013.