Getting its mojo back!
As highlighted in our post-roadshow note, Muhibbah offers the most attractive turnaround prospect among the smaller-cap contractors. Prospects are being spurred by oil & gas infrastructure, marine/port-related work and a fabrication licence from Petronas.
We raise our RNAV to capture the surge in Favelle Favco's market cap and a lower WACC of 7% (from 8%) for its airport concessions. We further cut our RNAV discount from 40% to 30% to reflect investors’ rising appetite for smaller caps, its oil & gas exposure and its order-book recovery, which raises our target price. Maintain Outperform. Catalysts are job wins in 2H13 and new recurring-income assets.
The stock has surged 51% since we promoted it during our sector roadshow in early Jul. YTD, it has emerged as the best-performing smaller-cap stock under our coverage (+216% YTD). After the wrath over the Asia Petroleum Hub (APH) issue and a RM245m write-down taken in 4Q12, its turnaround had started with the award of a Petronas offshore fabrication licence. This could put the company in the running for an initial RM600m-900m worth of work. We followed-up with a call to management yesterday and were pleasantly surprised that management sounded more positive on its order-book growth. The group has been prequalified for three work packages for Petronas's Rapid project. Overseas, it hopes to add recurring-income streams, by tendering for airport concessions in Myanmar. We are optimistic on its chances.
What We Think
After APH, Muhibbah now offers a strong turnaround prospect on the back of domestic oil & gas E&P. This does not include potential MRT wins over the longer term. Order-book visibility for all divisions, including cranes and shipyard, is improving. In our recent roadshow, we sensed that foreign investors’ interest is returning.
What You Should Do
Accumulate. Valuations do not look stretched as there is upside to numbers, in our view. Our EPS forecasts are 14-19% below consensus. We could revise them once its job momentum picks up, expected in 4Q13.
Publish date: 18/07/13