The story is still compelling
Muhibbah's recent share price re-rating is a signal that the market has begun to price in the group's positive earnings prospects in 2014. We believe that the positive sentiment will be sustained in 2014. Our checks with management confirm our view that there should be a strong uptick in job flow in 1H14. The group's business model continues to capitalise on the domestic construction upcycle and oil & gas (O&G) spending spin-offs. Its construction order book will be replenished by the potential highway and port-related works, in addition to a possible O&G steel fabrication job (its first). We maintain our Add rating and target price, still pegged to a 30% RNAV discount. The realisation of strong order flows in 2014 will be catalysts for RNAV and EPS.
Optimism still in the air. Muhibbah's share price has risen by 6.3% since our last update, which stated that the group's turnaround prospects are still intact in 2014. We followed up with management on the group's job outlook. Its tender book has swelled to RM4-5bn in Jan 2014 from 6-9 months ago. The tender book predominantly features O&G-related contracts, including the potentially sizeable packages for RAPID and the regasification plants, as well as the highway packages for the West Coast Expressway (WCE) and widening of the South Klang Valley Expressway (SKVE). Muhibbah’s crane order book could exceed its all-time high of RM1bn currently, while its shipyard orders are rising thanks to the pent-up domestic demand.
What We Think
Story remains attractive. We are reassured by management’s confidence that its job flow prospects will still be good in 2014. The crane orders were strong in 2013 (Favelle Favco; FFB MK, NR), reaching an all-time high of RM1bn. We expect the civil/infra job wins to catch up in 2014, driven by the O&G-related works from Petronas's RM60bn capex p.a. Muhibbah’s O&G-related earnings are expected to comprise more than 60% of FY14 net profit, instead of the c.50% in the past, boosted by the potential oil & gas steel fabrication works. The Petronas steel fabrication licence win in 2013 raised the group’s profile and put it on par with the other local pure O&G players. Our base case assumption of RM1bn new order book wins in 2014 is intact.
What You Should Do
Accumulate. Muhibbah is ripe for further re-rating as it still offers the most attractive turnaround prospects of all the smaller-cap contractors under our coverage and the biggest exposure to the potential O&G spending spin-offs.
Total order book could swell to an all-time high
RM2.1bn and rising. Muhibbah's total outstanding order book stood at RM2.1bn at end-2013, including Favelle Favco's (cranes) orders of RM1bn (an all-time high). We expect Muhibbah’s shipyard orders to surpass the high in 2009, driven by the pick-up in domestic chartering contracts for O&G. We gather that the continuous construction of offshore O&G structures, particularly rigs and platforms, has created pent-up demand for vessel orders.
The group has the capacity to construct up to 3-4 AHTS vessels p.a. based on its current run rate of 2-3 vessels p.a. While 2013 was a good year for its crane order book, we believe that 2014 will see the shipyard orders gain momentum. We also expect an uptick in orders from the civil/infra segment in 2014 to comprise the bulk of the group's estimated RM4bn-5bn tender book. Our base case assumption of RM1bn new job wins in 2014 remains intact, with potential upside.
Still vying for sizeable jobs from RAPID. Given the limited supply of marine/port contractors locally, we believe that the group will benefit from more infrastructure jobs related to Petronas's RAPID project in Greater Iskandar. Muhibbah has been prequalified for three packages: 1) an oil storage tank project, 2) the jetty and associated works, and 3) EPC work for a power plant. The projects should be worth at least RM1bn each. Petronas appears likely to start awarding the contracts in 2H14.
Petronas's offshore fabrication licence could be the game-changer. Muhibbah was awarded an offshore fabrication licence by Petronas last year. This is expected to catapult the group into the league of first-tier players/licencees, alongside SapuraKencana, MMHE, TH Heavy Engineering, and Bousted. Muhibbah aims to secure jobs worth RM600m-900m in the offshore segment in the next 12-18 months. The offshore licence could boost Muhibbah’s profile and make it a likely beneficiary of Petronas's RM60bn capex p.a. There are no strains on Muhibbah’s capacity as the group owns an 80-acre yard in Teluk Gong, which is currently operating at a 28% utilisation rate for shipbuilding work.
Specialised jobs including highways, ports and new regasification plants. It appears that there are still extensive domestic civil infra work opportunities in highways, ports and regasification plants. The group plans to tender for the subcontract works for the RM6bn West Coast Expressway (WCE), capitalising on its track record and cost advantage from its ongoing construction of the South Klang Valley Expressway (SKVE), which will be linked to the WCE. Management also noted that there could be several port-related infra works up for grabs, including the potential extension of West Port. Furthermore, the government plan to build two more regasification plants could lead to more work in Sabah and Johor. Muhibbah has been invited to bid for the regasification projects as it was one of the main contractors for the Melaka regasification plant. On a separate note, the group still stands a good chance of securing at least one O&G infra package in Cambodia.
Publish date: 21/01/14