Muhibbah Engineering - SPV to revive APH

We attended Muhibbah’s analyst  briefing last Friday and are optimistic over the initiatives taken by management to solve the APH issue via a SPV. Management reiterated that its APH receivables write-off is fairly muted at this juncture as the company is finalising a debt to  equity swap with APH and CIMB Bank by July 2012. Meanwhile, Muhibbah’s current construction order book remains healthy at RM2.2b, which comprises of projects  such  as  i)  Wiggins  Island  Coal  Export  Terminal  (WICET), ii) LNG regasification project in Melaka (EPCIC), iii) catering facilities project in New Doha International Airpot, Qatar, etc. Its current order books for the crane and shipbuilding segments are also robust at RM760m and RM113m respectively. We are maintaining our OUTPERFORM recommendation with the unchanged Target Price of RM1.97 based on SOP valuation. We believe that the finalisation of the APH issue will lift the share price performance.  

Another RM1.0b for APH completion.  Based on its initial work scope, APH is already 60% completed. Management is of the view that to complete the remaining 40% of the work scope, APH needs another RM1.0b and with another 2-year  time frame to complete. With regards to the debt-equity swap exercise, management said it is  in the midst of discussion with other APH’s creditors to set up a Special  Purpose Vehicle (SPV) to develop and revive the project. The SPV is believed to raise another RM1.0b to finance the project. However, management is still awaiting updates from the auditors to qualify the shareholdings  structure of the SPV. The next key milestone on this development is July 2012, when the court order for the SPV expires. 

Favelle Favco’s prospect remains positive.  The outlook for the crane division under Favelle Favco remains positive with its current order book of RM760m for the next 2 years. The division posted a double-digit growth (+66%) in net profit from RM28.6m to RM47.6m in FY11. The group is currently operating four plants in four countries, i.e. i) Senawang, Malaysia, ii) Sydney, Australia, iii) Copenhagen, Denmark and iv) Texas, USA. A big chunk of its contracts (79%) is generated from overseas markets and mostly (69%) from global oil and gas companies. Moving forward, we believe that its crane division will continue to do well as its cranes are niche equipments and have been used to build some of the world’s tallest buildings such as Burj Khalifa, Freedom Tower, Taipei 101, etc.

Outstanding order book stands at RM3.2b.  Presently, Muhibbah’s outstanding order book stands at RM3.2b, which is mainly derived from its construction division contracts worth RM2.2b followed by its cranes division and shipyard division contracts worth RM760m and RM113m respectively. As we understand, Muhibbah is slated to tender for another EPCIC project from Petronas once it has completed the current EPCIC project in Melaka. However, the project in New Doha International Airport, Qatar is facing some minor delays due to variation orders from the owner.

We are maintaining our OUTPERFORM recommendation on Muhibbah with an unchanged Target Price of RM1.97 based on SOP valuation.  There are no changes to our FY12E earnings estimates and we have factored in a RM500m order book replenishment assumption in our forecast. To date, the total projects value secured is at RM96m, which is the extension works for the WICET project. We have not included the potential value from APH in our fair value pending the finalisation of the SPV shareholding structure i.e. the percentage of equity portion for Muhibbah.

Source: Kenanga