Muhibah ... Mar11

Insider Asia by Asia Analytica

Gearing up for next growth phase
Cost overruns over, loss-making projects completed
Order-book building up again, now at RM3.1b
Attractively priced well below peers

Muhibbah Engineering, a former darling of investors, is set to make a major comeback as it puts its overseas projects’ cost overrun issues behind it and gears up for the next phase of growth.

The company has a diversified earnings base, with earnings from infrastructure construction, cranes, shipyard, as well as concession income from airport and road maintenance.

It will benefit from the ramp up in construction activities for projects such as the Klang Valley’s Mass Rapid Transit (MRT) system, as well a slew of property developments on privatized state-owned land, such as the 3,300 acre Rubber Research Institute (RRI) land in Sungei Buloh.

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.

Muhibbah was a favourite of investors in 2005-2006, when the then low profile company saw its share price surge as investors, especially foreign funds, warmed up to its growth prospects, attractive fundamentals and low starting valuations. The company had positioned itself as a global construction and infrastructure player, and an Indochina play.

Muhibbah secured a number of large domestic and international contracts, which boosted its order-book from RM810 million in 2005 to a peak of RM4.31 billion in 2008. As a result, net profit rose nine-fold from RM7.8 million in 2004 to RM70.1 million in 2007.

However, the aggressive growth also came at a price.
The sharp rise in building material prices just before the global financial crisis and cost overruns at its Yemen LNG project caused losses in 2008 and 2009 for the core infrastructure and construction division, although the company remained profitable.

Net profit declined from RM70.1 million in 2007 to RM21.8 million in 2008 and RM12.7 million in 2009. Its share price slumped, exacerbated by the global crisis and the exit of foreign shareholders. We understand its foreign shareholding stood at about 40% at its peak, but has since fallen to below 10%.

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 results were already evident, with net profit for 2010 increasing 2.6-folds to RM33.8 million, driven by a turnaround in the infrastructure construction division, which returned to the black with a pre-tax profit of RM5.17 million, compared with operating losses of RM65.4 million in 2009.

As at 22 February 2011, Muhibbah’s outstanding order book totaled RM3.1 billion, comprising RM2.29 billion from infrastructure construction, RM453 million from cranes and RM360 million from shipyard. About 49% of the total order-book is related to the oil and gas industry.

Meanwhile, a likely resolution of long outstanding issues surrounding the Asia Petroleum Hub (APH) project in Johor, for which Muhibbah has been owed some RM340 million since mid-2009 for works completed but not paid,could also lift sentiment on the stock. The sums owed are listed as receivables, and have not been written down.

We expect Muhibbah’s growth momentum to accelerate in 2011 and 2012 as its loss-making overseas projects give way to more profitable ones, and as order-book replenishment gets underway. We expect net profit to increase 46.3% to RM49.5 million in 2011 and 19.9% to RM59.3 million in 2012, with
EPS of 12.4 sen and 14.9 sen, respectively.

At RM1.56, Muhibbah is trading on attractive P/E valuations of 12.5 times for 2011 and 10.5 times 2012 earnings and a modest 1.2 times its book value of RM1.28 as at Dec 2010. Its valuations are far lower than the major construction players, such Gamuda and IJM Corp, which trade at 20-21 times forward earnings and WCT, which trades at 15 times.

We maintain our BUY recommendation.