Muhibbah Engineering poised for more contract wins

PETALING JAYA: Muhibbah Engineering (M) Bhd is poised to win more contracts from the oil and gas services and public infrastructure segments as both enter up-cycles, says Rakuten Trade Research.

The research house noted that as of February 2024, Muhibbah’s outstanding order book for the construction and cranes division stood at Rm2.21bil, which is 1.7 times its financial year ended Dec 31, 2023 (FY23) revenue cover ratio.

Rakuten Trade Research expects Muhibbah to secure more contracts as Petroliam Nasional Bhd’s (PETRONAS) capital expenditure (capex) spending enters an up-cycle and from transportation infrastructure projects such as the Penang LRT line, which requires a noise barrier system.

“This solidifies Muhibbah’s earnings visibility as it enters into an earnings up-cycle,” the research house said in a research note yesterday.

Rakuten Trade Research also expects Muhibbah to benefit from its associate’s explosive earnings recovery from airports in Cambodia as tourists’ traffic continue to recover.

According to the research outfit, as of the final quarter of 2023 (4Q23), Cambodia airport passenger levels were at 40% of the pre-pandemic levels recorded in 4Q19.

“We believe passenger traffic will recover further from the influx of Chinese tourists. As a comparison, passengers from China in FY23 only account for about 41% of FY19 level,” the research house said.

Furthermore, Rakuten Trade highlighted Cambodian airports have raised passenger service charges and aeronautical charges by at least 20% since October 2023.

This adjustment has helped mitigate the impact of the absence of revenue and profit contributions from Siam Reap airport following the compensation exercise.

“The culmination of these positive factors will propel earnings from its associates to a record high in FY24 and beyond,” Rakuten Trade Research concluded.

Muhibbah reported core net profit of Rm45mil in 4Q23, bringing its full-year FY23 core net profit, inclusive of associate contributions, to Rm53mil.

This result surpassed Rakuten Trade’s forecast by 141% and was attributed to the better performance of Muhibbah’s marine shipyard, cranes and intelligent automation divisions as well as a better-than-expected recovery in tourist traffic in Cambodia.

Given the better-than-expected execution and improved earnings growth prospects, the research firm has elevated its FY24 and FY25 core earnings per share forecast for Muhibbah by 41% and 43%, respectively.

Rakuten Trade Research has a “buy” call on Muhibbah with a target price of RM1.14 per share.

It highlighted that as of 4Q23, the company’s net gearing stood at 0.05 times.

“Given that Muhibbah has Us$63mil of cash compensation in the associate as a result of surrendering Siam Reap Airport, a repatriation of its share of cash compensation of over Rm60mil will reduce its net gearing further,” the research house said.

This would further be a boost to the group’s robust operational cash flow generation of over Rm150mil a year. Rakuten Trade Research expressed confidence that Muhibbah will be able to leverage its balance sheet to secure more contracts and at the same time reward its shareholders.