Muhibbah’s robust fundamentals supported by sturdy orderbook, recurring income from Cambodia

KUCHING: Muhibbah Engineering (M) Bhd’s (Muhibbah) robust fundamentals are expected by analysts to be supported by the group’s study orderbook and recurring income from Cambodia while the refinery and petrochemical integrated development (RAPID) project is projected to provide a fillip.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) believed that the gap between

its intrinsic value and the market price will slowly but surely converge.

According to MIDF Research, this optimism is underpinned by Muhibbah’s sturdy orderbook of RM3 billion with 36-months backlog, stability in the group’s working capital, steady recurring income from Cambodia concessions and ample financial headroom to undertake other concessions and expand its orderbook.

The research arm noted that Muhibbah’s weighted average cost of capital (WACC) is six per cent; slightly above the group’s peers’ median of 5.8 per cent indicating a stable operation which is not saddled by limited means of raising funds.

On another note, decreasing revenue contribution from Favelle Favco Bhd due to insipid demand from oil and gas infrastructure services may prove transient as MIDF Research surmised that topline recovery may ensue once some of the core projects in RAPID (such as the crude oil distillation and kerosene hydro-treatment plants which are heavy on structural steel and fabrication) kick in.

“Moving forward, infrastructure construction contribution to revenue will potentially amount to more than 65 per cent,” it said.

Forecasts- wise, MIDF Research maintained its earnings estimates as its conviction was positive in regard to Muhibbah’s infrastructure-focused business model.

All in, MIDF Research maintained its ‘buy’ recommendation with a target price of RM3.05 per share based on sum of parts valuation.

The research arm noted that currently, Muhibbah’s stock price is at nine per cent below high for financial year 2015 (FY15) to second half of FY16 (2HFY16) and is trading at price earnings ratio (PER) of only 9.5-fold (1.2 standard deviation (SD) below its peer’s median of 15.7-fold) and beta of 1.41.

ItfurthernotedthatMuhibbah’s equity value (EV)/earnings before interest, tax, depreciation and amortisation of 12.2-fold is below peers’ median of 13.9-fold which presents an attractive level of discount.