Muhibbah Engineering (M) Bhd BUY. Company update. 19 August 2013

Transcription

1 Company update 19 August 2013 Muhibbah Engineering (M) Bhd Strong outlook ahead with APH legacy issues removed New Petronas licence opens up vast O&G opportunities Order-book of RM2.3b to underpin earnings Maintain BUY, attractively priced, positive outlook Share price RM2.49 Market capitalization RM1,017 million Board Main BUY Indices FBM Emas Syariah, Key stock statistics FY Dec12 FY Dec13E EPS (sen) (22.9) 17.4 P/E (x) NM 14.3 DPS (sen) NTA/share (RM) Issued capital (mil) week price range (RM) Major shareholders (%) Mac Ngan Boon 23.4% Lembaga Tabung Haji 9.9% EPF 7.4% Share Price Chart 3.00 Sector Construction Stock code 5703 By The Research Team Jan Aug-13

2 Recommendation Muhibbah Engineering is poised to make a strong comeback, after putting legacy issues relating to the stalled Asia Petroleum Hub (APH) project behind it. A newly awarded Petronas licence also gives it the clout to bid for major contracts from the national oil company, and become an even bigger oil & gas player. Muhibbah undertook a major kitchen sinking exercise last year, writing off its APH receivables and enabling management and investors to focus on the future. Despite making a RM245 million provision for APH in 2012, Muhibbah chalked up a small full year pre-tax loss of just RM35 million reflecting its underlying operational resilience. Excluding the provisions, the company achieved underlying pre-tax profit of RM210 million, almost double the record level of RM111.7 million achieved in Notwithstanding these provisions, Muhibbah is still pursuing legal claims for these receivables. Any write-backs in the future would be a bonus. The APH project an oil refinery hub in Johor has stalled over land lease and shareholder issues. But it is widely seen as strategic and likely to be salvaged, with earlier reported talks of a debt-to-equity conversion exercise by the project s two largest creditors, CIMB Bank and Muhibbah. We like Muhibbah s well-diversified income base, with earnings from infrastructure construction, cranes manufacturing, ship-building, and concessions from its airports in Cambodia and road maintenance in Malaysia. The group has grown into a global player, with businesses and projects in Asia, the Middle East, the US, Europe and Australia. More significantly, over the past decade, Muhibbah has transformed itself into a leading oil & gas player. Its expertise has not gone unnoticed. In June 2013, the company secured a coveted prize asset in the industry a licence by national oil firm Petroliam Nasional Bhd (Petronas) that will allow it to participate in upcoming offshore facilities construction and major onshore fabrication work for the national oil company and other oil majors in Malaysia. Indeed, Muhibbah is one of few companies with fully integrated facilities for oil & gas jobs. Its construction expertise includes offshore facilities and onshore construction fabrication, supported by Favelle Favco, its crane manufacturing arm which builds cranes for oil installations, while its shipyard builds anchor handling tug supply vessels. The group has a large order-book of RM2.3 billion as at 3 July Of this, 47% is tied to the oil & gas sector, making the stock an excellent and much cheaper proxy to that sector. The large order-book, as well as new potential projects from its Petronas licence, will underpin robust earnings growth in the medium term. 2

3 Compared with a net loss of RM93.2 million in 2012, we expect net profit of RM70.8 million in 2013 and RM92 million in 2014, with EPS of 17.4 sen and 22.6 sen, respectively. At RM2.49, the stock s P/E valuations of 14.3 times for 2013 and 11 times for 2014 are still very attractive, especially relative to its growth prospects, as well as other oil & gas and construction peers. Although Muhibbah s share price has surged strongly in the past few months, we believe they have yet to fully reflect the company s turnaround and earnings trajectory. We maintain our BUY recommendation. New developments Petronas Licence will boost order-book On 27 June 2013, Muhibbah announced that it was awarded a License by Petronas as an Approved Supplier for the Category of Offshore Facilities Construction Major Onshore Fabrication. The award was made about a month after the successful commissioning of the Melaka Regasification plant, which was built for Petronas Gas Bhd by a consortium comprising Muhibbah and Perunding Ranhill Worley Sdn Bhd (PRW). The award of this license qualifies Muhibbah to bid for upcoming Offshore Facilities Construction and Major Onshore Fabrication Works for Petronas and other oil major operators in Malaysia. This will qualify the company for Petronas RAPID (Refinery and Petrochemical Integrated Development) contracts. Muhibbah s tenders will be supported by its total solutions package, from construction to cranes and ship-building capabilities, backed by a strong track record. Apart from the Melaka Regasification plant, other major oil & gas related works completed include the Gorgon LNG project in Australia, Horizon Oil Terminal at Jurong, Singapore; Wharf Infrastructure Development at Port of Tanjung Pelepas and the Yemen LNG Oil Jetty Project. Muhibbah s total order-book stands at RM2.3 billion as at 3 July 2013, of which approximately 47% is tied to the oil & gas sector. In terms of segmental breakdown, RM1.24 billion of the order-book is for the infrastructure construction segment, RM867 million from cranes and RM196 million from shipyard. While management is focusing on the oil & gas sector, its infrastructure construction segment has expertise in building a wide range of civil works, including roads and highways, buildings and airports. 3

4 Among the major outstanding contracts are: Wiggins Island Coal Export Terminal Project in Australia (RM366 million outstanding order-book), Petronas LNG regasification plant (RM90 million), South Klang Valley Expressway (RM90 million), catering facility at the new Doha International Airport (RM114 million), multi-purpose wharf and container facilities at Northport (RM219 million) and government offices at Putrajaya (RM136 million). Cranes focusing more on oil & gas sector The crane manufacturing division, Favelle Favco, has been performing well since going public in Aug Since then, its pre-tax profit has increased from RM10.9m in 2006 to RM66.7m in 2012, net profit from RM9.9 million to RM61.7m while revenue increased from RM358m to RM696.7m. While Favco has charted decent revenue growth, the much faster bottom-line expansion were due to higher margins from earlier internal restructuring efforts to improve efficiency, penetrate new markets and focus more strongly on the oil & gas sector. Favco would complement Muhibbah s oil & gas project bids, with cranes used in terminals, port LNG facilities and offshore vessels. Favco s cranes are currently used by major oil & gas players such as Keppel FELS, Technip, ExxonMobil and Shell. Oil & gas related projects now accounts for 90% of its RM867 million order-book. Shipyard The shipyard division, under Muhibbah Marine Engineering Sdn Bhd (MME) has been more resilient despite the global shipbuilding industry volatility, thanks to its focus on anchor handling tug supply vessels (AHTS) for the oil & gas industry. It currently has an order-book of RM196 million, although down from a peak of RM702 million in 2009, when orders peaked just before the 2008 global financial crisis. The company has built over 120 vessels since it started operations in Going forward, MME is expected to ride on the current high oil prices and Muhibbah s new Petronas licence. MME s shipyard is located on over 80 acres in Telok Gong, next to South Port in Port Klang, with 2,800 ft of water frontage and water depth of up to 60 feet. Steady concession income Muhibbah s concessions consist of airport operations in Cambodia (under 30% owned Societe Concessionaire des Aeroports, or SCA) and a 21% stake in Roadcare (M) Sdn Bhd, which holds a 15-year concession for the maintenance of 6,000 km of federal roads in the central peninsular Malaysia, namely Selangor, Pahang, Kelantan and Terengganu. 4

5 The concessions segment made pre-tax profit of RM37 million in 2012, up from RM22.9 million in The Cambodian airport operations are held by 30%-owned SCA with the remaining 70% held by French construction conglomerate Vinci. SCA was awarded the concession for the international airport in Phnom Penh in 1995 and Siem Reap in Both concessions were originally scheduled to end in 2020, but have since been extended to 2040 following the award of a third international airport, in Sihanoukville. The airport operations enjoy steady income, reflecting the increasing popularity of Cambodia as a tourist destination with new direct flights, lowcost flights, and the increasing popularity of the world-famous Angkor Wat temples, a UNESCO World Heritage site. In , tourism arrivals into Cambodia fell for two years, due to the global financial crisis, H1N1 influenza scare and Thailand s airport closures, which disrupted travel to the Indochina region for long haul tourists. Since then, arrivals have rebounded strongly. Arrivals at the two Cambodian airports grew 17% in 2010, 13% in 2011 and 17% in 2012 with 4.3 million arrivals. For 1H2013, arrivals grew another 20% to 2.57 million. The Sihanoukville International Airport has seen three commercial flights weekly since last year by Cambodia Angkor Air from Siem Reap. Sihanouville is best known for its beaches, sea-port and garment factories. However, flights are still relatively limited due to a lack of quality accommodation in the town. Muhibbah, together with French-based Vinci SCA s major shareholder, has also been exploring other airports in the region. They recently submitted a joint bid for the privatisation of the Mandalay and Yangon Airports in Myanmar. Although the bids were unsuccessful, the consortium was the runner-up for the Mandalay Airport tender. 5

6 Profit & Loss Analysis Year end Dec (RM mil) E 2014E Turnover 2, , , ,350.0 EBITDA Depreciation (39.7) (44.5) (48.0) (52.0) Associates Interest income/(exp) (35.5) (31.5) (36.0) (39.0) Exceptional items (245.0) Pre-tax profit (35.0) Tax (29.2) (26.1) (34.3) (43.0) Minorities (18.8) (32.2) (32.0) (37.0) Net profit 63.8 (93.2) Operating margin (%) Pre-tax margin (%) 5.5 NM Net margin (%) 3.1 NM Effective tax rate (%) 26.1 NM Per Share Data Year end Dec E 2014E EPS (sen) 15.9 (22.9) P/E (x) 15.7 (10.9) Dividend (sen) Dividend yield (%) Payout ratio (%) 32 NM Book value (RM) Price/Book value (x) Cashflow/share (sen) Price/Cashflow (x) Gearing %* NM ROE (%) * excluding bills payables 6

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