• Muhibbah clinched two contract wins totaling RM479m – an extension of a Petronas contract, and the Lumut Maritime Terminal expansion.

• YTD wins of RM652m exceed our new order win forecast; execution, and in turn earnings delivery, is key for a sustainable share price re-rating.

• Reiterate Add and SOP-derived TP of RM0.90.

Adding More Petronas and Marine Contracts to Its Orderbook

• Muhibbah Engineering (Muhibbah) today (20 Nov 2023) announced two contract wins with a combined value of RM479m.

• Muhibbah, as the consortium lead partner, has accepted the activation of optional scope from Petronas Carigali worth about RM318m – for the provision of engineering, procurement, construction and commissioning and installation (EPCC+I) of light weight structure, Duyong brownfield modification and host tie-in for the Gansar Project, 190km from Terengganu shore. This is an extension of its current project awarded in Dec 2022 where it is the consortium lead partner. Muhhibah said works for this will start immediately and will complete by May 2024.

• The second is the Lumut Maritime Terminal expansion project (Phase 2A – construction of onshore infrastructure and offshore facilities inclusive of the main open type wharf) valued at RM161m. The project, awarded by Lumut Maritime Terminal Sdn Bhd, is scheduled to commence immediately and will take 20 months to complete.

Orderbook Exceeded Pre-pandemic Levels; Execution Now Key

• With these two contract wins of RM479m, YTD wins for construction amount to RM652m, bringing its total construction orderbook to RM1.6bn as at Nov 2023 (RM2.4bn including its crane business). Our current forecast assumes c.RM480m total new wins for its construction segment for FY23F and hence Muhibbah’s YTD wins have exceeded our forecast. Muhibbah had guided for EBITDA margin of 7-8% for the two latest projects won.

• Contract flows have been picking up since 3Q22, with more Petronas-driven projects. Its total orderbook of RM2.4bn as at Nov 2023 has exceeded its pre-Covid level of RM1.7bn as at Aug 2019.

• While Muhibbah’s contract flows have been encouraging, we believe the sustainable re-rating of its stock price hinges on the execution and delivery of its projects within the budgeted costs and their impact on its earnings. For the past two quarters, Muhibbah still registered small losses for its construction division.

Reiterate Add and TP of RM0.90

• We reiterate our Add rating and TP of RM0.90 based on SOP. We continue to like Muhibbah as a distressed proxy for a recovery in tourist arrivals with its Cambodian airport concessions (Phnom Penh and Silhanoukville) while its marine expertise and Petronas fabrication licence also enables it to clinch more Petronas jobs.

• Key downside risks are patchy execution track record which may lead to earnings disappointment and higher raw material costs which may impact margins.

• Re-rating catalysts include better earnings delivery and stronger-than-expected recovery in tourist arrivals for its Cambodia airport concession.

Source: CGS-CIMB Research - 20 Nov 2023