Muhibbah is shaping up to be a big beneficiary of Petronas' move, via the Refinery and Petrochemical Integrated Development (RAPID) project., to venture downstream.
KUALA LUMPUR: CIMB Equities Research is retaining Muhibbah Engineering as its preferred small/mid cap stock in the construction sector ahead of another bullish year for the infrastructure segment.
The research house said the group’s total wins of RM1.1bil in 2015 have far exceeded its and consensus’ targets of RM500mil and RM800mil.
“2016’s prospects for order wins could be much better, backed by its RM6bil tender book that is 50% higher than in 2015. Domestic jobs make up 100% of its tender book that is mainly focused on downstream refinery and petrochemical-related infra,” it said.
CIMB Research said the significance of Petronas shifting its capex from upstream to downstream developments, and the opportunities offered to local contractors, are still relatively underappreciated. Muhibbah is shaping up to be a big beneficiary of this move, via the Refinery and Petrochemical Integrated Development (RAPID) project.
It also pointed out that technical capabilities and working relationships with international EPCC contractors are key advantages. RAPID is also shifting the award scope to petrochemical packages.
“We believe Muhibbah is well ahead of other existing contractors there,” it said.
The research house said about 50% of the RM6bil tender book is downstream oil & gas and marine/port-related, of which the bulk could be from Rapid. Just a 20% success rate translates to RM1.2bil in potential wins for Muhibbah in 2016, higher than our assumption of RM800mil.
The other RM3bil from the total RM6bn tender book are non-oil & gas jobs. New wins from the RM2.6bil EPCC package to Samsung Engineering could be on the cards.
“The stock is trading 15% below its 2015 high. We believe there are several potential re-rating factors over the coming months, including 1) sustained positive newsflow for the infra segment, 2) recovery in Rapid awards, 3) other infra jobs in the rail, highways, and port/marine space, 4) margin expansion for its infra division, 5) stronger earnings for its US$-driven Cambodian airport concessions, and 6) recovery in foreign shareholdings which currently stand at just 10%.
“Among the contractors under our coverage, Muhibbah is the clearest proxy to oil & gas downstream infra, marine and port works.
“The stock trades at a still-attractive price-to-earnings of eight to nine times FY16-17, which is at a 28%-35% discount to the average construction sector P/E of 13 times to 15 times, unjustified in our view. Our target price of RM3.22 (30% RNAV discount) implies target P/Es of 12.8 times for FY16, and 11.5 times for FY17,” it said.
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