Getting its mojo back
After turning in the best stock performance in our universe in 2013, Muhibbah still offers the most attractive turnaround prospects among the smaller-cap contractors in 2014. Its prospects are backed by oil & gas infrastructure & marine/port-related work, as well as a fabrication licence from Petronas.
Our target price remains based on a 30% discount to RNAV, using a 15.9x CY15 construction P/E, which is in line with the construction sector's 5-year average. A strong order-book recovery and further newsflow from the oil & gas sector should provide catalysts. Following a change in our rating structure, our rating for Muhibbah changes from Outperform to Add.
Turnaround in 2014
Things are looking up for the group's infrastructure segment, given a limited supply of marine/port-related contractors locally. We believe the group can benefit from more infrastructure-related jobs from Petronas's RAPID project in Greater Iskandar. A fabrication licence from Petronas could also catapult the group to the league of first-tier players/licencees, side-by-side SapuraKencana, MMHE, TH Heavy Engineering and Bousted. Muhibbah is in the running for RM600m-900m worth of jobs over the next 12-18 months, from Petronas's RM300bn 5-year capex programme. Still, we believe domestic private-sector projects are likely to dominate sector developments in 2014. This is an area where Muhibbah stands out.
Order book heading for historical peak?
Outstanding order book was RM2.1bn at end-9M13, comprising RM1bn for its infrastructure segment, RM1bn for cranes and RM87m for its shipyard. Job flows are likely to be robust over the longer term, which should enable the group to match its peak order book of RM4.7bn in 2007. All segments − infrastructure, cranes (62%-owned Favelle Favco) and shipyard – appear to be heading for an order-book recovery.
Although Muhibbah is our best performer YTD (+187%), it still trades below its historical high of RM3.62 in 2007, when its order book peaked. Current valuations still offer ample upside to such levels.
Publish date: 10/12/13