Tuesday, July 16, 2013

Muhibbah Engineering : Tip of the iceberg (DBSV)

Muhibbah Engineering
BUY RM1.94
KLCI : 1,785.65
Price Target : 12-Month RM 3.10 (Prev RM 2.80)
Tip of the iceberg

Capitalising on Petronas license: pre-qualified for RM4-5bn worth of jobs
Malaysian proxy for Myanmar?
Cheap proxy to O&G sector and Favelle Favco
Maintain BUY with higher RM3.10 TP

Game changer. The recently secured Petronas license will turn Muhibbah into a prominent O&G player. It has pre-qualified for three projects worth RM4-5bn in total. Muhibbah is among the top three largest license holders, with 20k MT annual capacity. It intends to expand by 20 acres, which could double its fabrication yard capacity. We raise FY13-15F EPS by 3-10% after increasing new contract wins (value) by 10-20%. There is potential upside from variation orders and claims from previous projects. Currently, about half of Muhibbah’s RM2.3bn orderbook is O&G-related.


Closing in on Mandalay. We understand Muhibbah (together with Vinci and Shwe Taung) is in the final bid against another group to secure the Mandalay
International Airport concession. A ballpark calculation indicates the concession could boost FY14F recurring concession PBT by 24% (or c.6% of Group PBT). This is in anticipation of double-digit growth in passenger arrivals amid a booming tourism industry in Myanmar.

Cheap O&G, Favco proxy. We recommend switching to Muhibbah from Favelle Favco. Favelle is trading at a premium to Muhibbah’s FY14F PER, but Muhibbah holds a valuable Petronas license and offers 20-22% ROE (vs. FF’s 13-16%). We lift our TP to RM3.10 after upgrading EPS (by 3-10%) for construction and shipyard, and valuation to 10x (from 9x) for Favco in our SOP-valuation.

Positives from Petronas license. The Petronas license enables Muhibbah to tender for future Petronas contracts including construction of terminals and offshore facilities, and onshore fabrication works.

This could pave the way for the company to secure more RAPID (Refinery and Petrochemical Integrated Development by Petronas) contracts. As a niche marine construction specialist in Malaysia, Muhibbah may secure sizeable packages as RAPID requires major construction works. Future contract wins may also be supported by Muhibbah’s favourable track record. Among its past major O&G projects are the Horizon Oil Terminal at Jurong Island, Singapore,  Wharf Infrastructure Development at Port Tanjung Pelepas and Yemen LNG Oil Jetty Project.

Muhibbah’s construction and shipyard segments should be major beneficiaries of the inflow of RAPID projects. Currently, about 46% of its RM2.3bn orderbook is O&G-related, and the inflow of RAPID projects could increase that.

RAPID is estimated to require RM60bn to develop and may award more than 20 packages worth RM2bn-3bn each. Also, Muhibbah is among few companies with a shipyard which possess a similar Petronas license (Fig 4). Given limited domestic suppliers with similar capacity, Muhibbah could secure more jobs from Petronas.

Muhibbah is looking to expand its fabrication yard by another 20 acres which could potentially double its existing annual capacity of 20k MT. This would enable the Group to take on larger scale projects.

Muhibbah has been qualified to tender for three major O&G contracts worth up to RM3bn-4bn in total. This could be a strong near-term earnings catalyst as the Group is expecting the outcome within the next 6-12 months.

Positive on Mandalay Airport. We understand the Group is currently in the final bidding stage against another group for the concession of Mandalay International Airport.

We are positive on the concession as Myanmar’s tourism has been booming in recent years with tourist arrivals growing at double-digit percentage annually. The Minister of Hotels and Tourism was quoted as saying that visitors to Myanmar would reach 1.8m, which is a 30% growth from 2012. Meanwhile, the population in Myanmar is 52m versus 15m in Cambodia.

Post-expansion in 2015, annual capacity at Mandalay International Airport is expected to increase to 3.7m from 2.7m passengers.

A back-of-the-envelope calculation shows the concession could contribute RM12m PBT annually (c.6% of Group FY14F PBT). This is based on the following assumptions: i) 900k tourist arrivals, ii) similar shareholding structure as the concession JV for Cambodian airports, i.e. 21% effective stake, iii) passenger tax of USD10 (arrivals only); and iv) passenger tax would contribute half of total concession revenues.

Meanwhile, the JV could also earn recurring income from other airport-related services and facilities such as shop rental, profit sharing with shops, aircraft landing fee, and ground handling charges. These had been factored into our ballpark calculation above.

Muhibbah’s JV stands a good chance of securing the concession due to its current experience with Cambodian airports, and Muhibbah and Vinci’s construction expertise to expand the airport. The Cambodian airports concession started in 1995 and will end in 2040; we expect it to continue to contribute about ¾ of Group concession profits. Cheap proxy to Favco. We prefer Muhibbah to Favelle Favco, given Muhibbah’s cheaper valuation (6x FY14F PE vs 11x for Favco) and better diversification of businesses.

Based on O&G-related jobs secured by Muhibbah’s various divisions, Favco’s cranes could complement some projects such as terminals, port LNG facilities and offshore vessels. This would enable the Group to provide more comprehensive and integrated services to its O&G customers.

Favco’s cranes are reputable among major O&G MNCs such as Keppel FELS, Technip, ExxonMobil and Shell. Keppel FELS remains Favco’s key customer with consistent annual
orders.

Valuation
Maintain BUY, raised TP to RM3.10 TP based on revised SOPvaluation. We raised construction and shipyard earnings. We lift target valuation multiple for Favco to 10x FY14F PER (from 9x) because of: i) strong orderbook and consistent inflow of new contracts, ii) wide exposure to global market; and iii) large exposure to O&G-related projects.


Source/Extract/Excerpts/来源/转贴/摘录: HWANGDBS Vickers Research
Publish date: 15/07/13

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