Analysts positive on Muhibah Engineering’s long term prospects
KUCHING: Analysts remain positive on Muhibah Engineering Bhd’s (Muhibah) long term prospects, despite disappointing results from its third quarter 2016 (3Q16), which saw a 64 per cent fall quarter over quarter (q-o-q), underpinned by five per cent decrease in revenue.
The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) noted that this weaker performance was a result of a 14 per cent decrease in billings recognised due to timing factor, higher provision for warranties, and lower contribution from associates.
Despite a weak 3Q16, analysts are still confident in Muhibah’s long term performance due to its admirable orderbook which amounts to RM1.86 billion, providing ample earnings visibility for the next 26 months, and 3.5 fold of construction revenue cover.
In the medium-to-near term, Kenanga Research noted that Muhibah would remain as a strong contender in the construction industry, with its focus remaining unchanged on RAPID while bidding for MRT2 and other infrastructure jobs like LRT3, which would be sufficient to meet Kenang Research’s RM1.0 billion orderbook target for Muhibah.
“We also expect Muhibah to register a better 4Q16 as we do not expect more provisioning from its crane division coupled with a stronger contributions from its associates in 4Q16,” added the research arm.
Looking back at the performance on a year- on-year (y- o-y) comparison, Muhibah saw a 33 per cent decrease to its ninth month 2016 ( 9M16) core net profit ( CNP) of RM62.1 million. This came below expectations, meeting only 68 per cent of Kenanga Research’s full year estimates.
“We believe the negative deviation was due to lower than expected operating margins mainly driven by the provisioning incurred on its crane division coupled with a higher-than expected contribution to its non- controlling interest,” opined the research arm.
The research arm went on further to explain that the decline in CNP was mainly attributable to the compression in pre-tax margins for both Muhibah’s crane and shipyard division which saw decreases of 3 to 6 points, to 14 to 15 per cent, respectively.
As a result, after adjustments to Muhibah’s operating margins, Kenanga has since revised its financial year FY16-17 estimated core earnings down by 7 and 6 per cent, respectively.
On the other hand, Midf Research, the research arm of Midf Amanah Investment Bank Bhd, has left its earnings estimates for Muhibah intact as it was observed that Muhibah’s profit after tax and minority interest (PATAMI), which saw a decrease of 41 per cent y- o-y, was above their expectations, registering for79 per cent of their full year expectations.
Midf Research explained that “the mixed reaction is a result of our conservative view of adjusting out estimates earlier to reflect the slower pace of project awards for RAPID in Pengerang.”
Kenanga Research maintains its ‘outperform’ call on Muhibah with a lowered target price ( TP) of RM2.48, based their sum- of-parts ( SOP) valuation, which implies a FY17E price earnings ratio ( PER) of 11.5 fold, which is inline with Kenanga’s small- and-mid caps constriuction peer’s range of nine to 13 fold.