Bintulu Port job termination – no major impact on Muhibbah seen

21 Jan 2019 / 19:30 H.

PETALING JAYA: Analysts view the impact from the termination of Muhibbah Engineering (M) Bhd’s contract by the Bintulu Port Authority as managable and they expect the Cambodian airport concession to hold the fort for the group.

MIDF Research displayed a conservative stance by down-grading its rating on the stock to “neutral” with an unchanged target price RM3.15.

According to the research house’s rough estimates, with work reaching a progress of 45-50%, the contract’s current unbilled value ranges between RM200 million and RM220 million, which is at about 9.7% of the group’s out-standing order book of RM2.1 billion.

“Assuming that fair com-pensation for Muhibbah is agreed upon, we need to caution that reparation could take a while to materialise. Based on current price, our target price implies 7.5% upside to investors and earnings yield of 6.7%. Moving forward, we believe any retracement in share price will unveil attractive position for entry,” it said.

The research house noted that based on the current circumstances, the risk is concentrated on near-term earnings projection and the impact will be muted for FY20 onward.

Muhibbah is currently in negotiations with Bintulu Port Authority in relation to the compensation.

Alliance DBS Research, on the other hand, maintained its “buy” call on the stock at a lower target price of RM3.55 (previously RM3.65) in view of a lower sustainable order book.

It said the termination was due to the government’s concerted efforts to reduce its borrowings to a manageable level and not from any non-performance of the contractor.

Alliance DBS estimates that Muhibbah’s 51% stake in the project is worth an estimated RM298 million or circa 16% of its outstanding construction order book, assuming that 20% of work done at Bintulu Port.

It has cut the group’s FY19-20 earnings forecasts by 5-6% to account for the loss of the Bintulu Port contract.

However, Alliance DBS noted that Muhibbah’s construction division has taken a supporting role in the group given the strong growth of its Cambodian airport concessions, which contribute 70% of the group’s bottom line.

Kenanga Research expects traffic growth at the Cambodian airports to remain robust at high teens and it remains one of its major earnings contributors.

“Muhibbah’s outstanding order book currently stands at RM1.8 billion (construction: RM1.3 billion, cranes: RM500 million) providing it with at least two years of visibility.

Following the termination, Kenanga expects some knee-jerk selling of its shares, but it could present a compelling entry level given minimal impact from the termination.

Muhibbah’s share price was down 19 sen or 6.35% to close at RM2.80 last Friday with 4.57 million shares changing hands.


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