Muhibbah Engineering 3QFY08 : All fears priced in?

December 10, 2008 at 6:33 am Leave a comment

• Within estimates.
Muhibbah’s 9M annualised net profit came in within our expectations but 16.5% below street estimates. Y-o-y, the Group achieved commendable PBT growth of 18% while net profits grew by 12.9%. Earnings for the 9M08 so far have been driven predominantly by the Group’s construction and infrastructure segment. Shipbuilding earnings have been flattish as well as the airport concessions while Favelle Favco has been putting a bit of a drag on margins.
• Favelle Favco still under cost pressure.
Favelle Favco continues to be plagued by high raw material costs and general increase in operating expenses hence margins have shrunk to a dismal 3% in 9M08 at PBT level compared to 4.7% achieved in 9M07. Looking forward, we expect that cost pressures will continue for Favelle
Favco and have factored in soft margins. To note the segment’s order book continues to be relatively robust at RM751m but we have factored in slower growth given the segments exposure to the construction & oil & gas sector.
• Cambodian airports no longer the gem.
Over 2006 & 2007, the Group’s airport concessions saw tremendous growth but the scenario is much different this year especially with poor economic performance the world over currently. Growth in passenger arrivals appear to be flattish at best and this should prolong into 2009. The
segment now makes up 20.4% of PBT.
• RM4.7bn outstanding order book.
Muhibbah’s order book still is pretty meaty with major projects like the SKVE, Yemen LNG terminal, Doha airport works underway and turning in better profits y-o-y. However, it does have some unmoving projects like the oil terminal in Johor worth RM500m. Ex- that project, orderbook shrinks to RM4.2bn and should still last the Group 2-3 years.
• Upgrading to a Buy
Muhibbah’s share price has come off to unprecedented lows and the Group has lost some RM1bn in market cap over the past year. Indeed earnings have disappointed in the 1H but we believe that past and future concerns have been priced in. Our sum-of-parts TP is adjusted to RM1.77
to reflect Favco’s current share price but we upgrade to BUY in view of the upside potential to our TP as well as that the stock trades below NTA.


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