Muhibah ... Jun11

Insider Asia.

Results above expectations, upgrade forecasts by 40%
Cost overruns over, broad based growth
Order-book of RM2.8b to drive earnings
On next phase of growth, attractively priced

Muhibbah Engineering delivered a splendid set of results for 1Q2011 that well exceeded expectations, with broad-based growth across all divisions. Notably, the construction division returned to profitability as the LNG project in Yemen, which was saddled with cost-overun issues earlier was completed.

Despite a small 4% decline in revenue to RM394.3 million in 1Q2011, Muhibbah’s pre-tax and net profit tripled to RM25.1 million and RM18.2 million, respectively. This accounts for 37% of our earlier full year net profit forecast of RM49.5 million, which we are revising upwards.

There was broad-based growth across its four major divisions – infrastructure construction, cranes, shipyard and concessions. Overall group pre-tax profit margin improved from 2.2% to 6.4%.

The strong rebound was driven by the infrastructure construction division, which was earlier depressed by losses due to large cost overruns at the Yemen LNG project, which affected earnings from 2008 to parts of 2010. This had resulted in the division posting operating losses of RM62.1 million in 2008 and RM65.4 million in 2009.

We understand this project has since been completed with full payment received. This is positive as it closes a chapter in Muhibbah’s books, and is timely in view of the recent political problems in Yemen and the Middle East.

In 1QFY11, the infrastructure construction division saw a pre-tax profit of RM8.4 million compared with a loss of RM11.7 million in 1Q10. Revenue for the division increased 11.9% to RM296.1 million.

Revenue growth for the other divisions was led by shipyard (up 15% to RM131.1 million) and cranes (up 13.6% to RM85.2 million). Apart from infrastructure construction, pre-tax profit grew strongest at the shipyard division (up 33.9% to RM20.7 million), followed by cranes (up 10.5% to RM4.2 million) and concessions (up 5.1% to RM7.6 million).

We are raising our 2011 and 2012 forecasts by 40% and 35% respectively. We now expect net profit to rise 105% to RM69.4 million in 2011 and 15.3% to RM80.1 million in 2012, with EPS of 17.5 sen and 20.2 sen, respectively.

The company’s earnings will be driven by a large RM2.86 billion order-book (as at 19 May 2011), which will last until 2013. The order-book comprises RM2 billion from infrastructure construction, RM496 million from cranes and RM358 million from shipyard.

At RM1.65, Muhibbah is trading on attractive P/E valuations of 9.4 times for 2011 and 8.2 times 2012 earnings. Its valuations are far lower than the major construction players, such Gamuda and IJM Corp, which trade at 20-22 times forward earnings and WCT, which trades at 14 times.

We maintain our BUY recommendation.
Muhibbah Engineering is set to make a major comeback as it puts its overseas projects’ cost overrun issues behind. After spending much of the last two years on a “kitchen sinking” exercise and completing its less
lucrative projects, Muhibbah is now well positioned for the next phase of growth and is rebuilding its order-book with better quality projects.

The company has a diversified earnings base, with infrastructure construction, cranes, shipyard and concession income, and will benefit from the ramp up in construction activities for major projects such as the Klang Valley’s Mass Rapid Transit (MRT) system.

Meanwhile, the focus on the oil and gas sector will serve it well as the government allocates more spending under the Economic Transformation Programme, and with national oil giant Petronas Nasional planning to spend RM250 billion in capex over the next five years.

Indeed, after a lull in oil and gas contracts in the past 2-3 years, following the global financial crisis and the subsequent volatility in crude oil prices, oil and gas exploration activities and contracts are increasing again, and Muhibbah’s expertise in the sector gives it a good chance to secure more contracts.

This year, Muhibbah has secured two major oil and gas related contracts. On 25 May 2011, the company announced that it was given a letter of commitment by Leighton Contractors Pty Ltd for the pre-assembly of heavy lifting facility and tug pen breakwater caissons and preparation of shipping barges for the Gorgon LNG Jetty and Marine Structure Project in Australia for a contract sum of RM101 million.

Earlier on Jan 26, 2011, Muhibbah, in consortium with Perunding Ranhill Worley Sdn Bhd, was awarded the contract for the engineering, procurement, construction, installation and commissioning for the LNG Regasification Unit of the LNG Regasification Project in Melaka. The contract was awarded by Petronas Gas Bhd with a contract value of RM1.07 billion.

We understand Muhibbah’s portion of the project is worth RM480 million. Meanwhile, Muhibbah’s crane and shipyard divisions are also faring well while its concessions provide consistent and defensive income.

The concessions consist of stakes in airport operations in Cambodia (under 30% owned Societe Concessionaire des Aeroports, or SCA) and a 21% stake in Roadcare (M) Sdn Bhd, which holds a 15-year concession for the maintenance of 6,000 km of federal roads in the central region of peninsular Malaysia, namely Selangor, Pahang, Kelantan and Terengganu.