Muhibbah Engineering - Three awards alone in March

News  Muhibbah announced yesterday that it had received a ship building contract award worth RM216m from Jasa Merin (Malaysia) Sdn Bhd, a 70%-owned subsidiary of Silk Holdings Berhad. At the same time, its 62%-owned subsidiary Favelle Favco also announced four crane orders totalling up to RM78.8m.

Comments  The contract awards and caught us by surprised on their timings as the contract awards all came within a month.

 We are pleased with the contract flows from Muhibbah as the above will be Muhibbah’s second and third contract awards for the month of March itself, bringing its total wins alone for the month to RM496.8m, which made up 25% of our RM2.0b total order book replenishment assumption for FY13. To recap, MRT Co. had announced earlier in the month that it had also secured a contract worth RM202m for the design, supply, installation, testing and commissioning of noise barriers and enclosures (Package V1-V8) to Muhibbah-SV-Samjung Joint Venture (JV).

 Based on its historical track record, we expect the operating margin for its ship building award to hover at about 18%-20% with an estimated order book burn rate of 24-30 months. To recap, Muhibbah was awarded a similar contract sum of works by Jasa Merin back in Dec-08 and the delivery of the vessels took place in 2012.

 Favelle’s cranes’ order of RM78.8m is likely to have a shorter burn rate of 12 months with an operating margin of 10%-12%. We expect 75% of the purchase orders to contribute positively to its FY13 earnings with the balance in FY14.

 On the other hand, there will not be any earnings contribution from on the RM202m MRT Co contract award in the near term as we understand that works on noise barriers and enclosures on package V1-V8 can only be executed once the elevated portion from V1-V8 is completed. However, we are waiting for more details from Muhibbah as there has been no formal announcement by the company on the project award yet.

Outlook  We believe that given that it had already made full provision for its potential liabilities in Asian Petroleum Hub (“APH”) in FY12, Muhibbah is now set to put the dampening issue behind and ride on new positive contract flows after GE13.

Forecast  There are no changes in our earnings estimates as the abovementioned contract awards fall within our order book replenishment assumption of RM2.0b.

Rating   Upgrade to OUTPERFORM

 We are upgrading our recommendation on Muhibbah from a MARKET PERFORM to an OUTPERFORM given the positive sentiment likely for the stock as it moves forward from the APH issue.

Valuation  We have increased our Target Price on Muhibbah to RM1.46 from RM0.86 as we removed the APH provision discount, which was amounted to RM0.60/share, from our SOP valuation given that Muhibbah books are now clean after APH was fully provided for.

Risks  Delays in project execution and a spike in building material prices.

Source: Kenanga