• 3Q23 earnings recovery across all divisions is encouraging; construction pretax profit back in the black.

• Orderbook of RM2.4bn has exceeded pre-Covid 19 levels; execution is key.

• Reiterate Add and TP of RM0.90.

3Q23 Showed a Marked Improvement Across All Divisions

• Muhibbah Engineering (Muhibbah) reported 3Q23 headline net profit of RM6.1m. However, stripping out some one-offs, 3Q23 core net profit was RM7.7m (bringing 9M23 core net profit to RM7.9m (vs. core net loss of RM8m in 9M22). This was on the back of a 20% increase in 9M23 revenue to RM814.8m.

• We deem the results to be in line with our and Bloomberg consensus estimates as we expect a strong 4Q, driven by a seasonal strong quarter for its Cambodia airport concession and continued improvement in construction earnings.

• We are encouraged that all its divisions showed yoy and qoq improvement in 3Q23. In particular, its construction division made RM8.3m in pretax profit in 3Q23 (vs. loss before tax of RM1m in 2Q23 and loss before tax of RM11m in 3Q23). Pretax profit for its crane business in 3Q23 jumped 113% yoy and 3% qoq to RM19.9m.

• 3Q23 associate profit contribution of RM14m (vs. 2Q23 RM8m and 3Q22 of RM0.8m), which is largely from its Cambodia airport concession, showed a strong recovery. 9M23 clocked 3.7m passenger arrivals, a 162% yoy jump, but 3Q23 passenger arrivals were largely flat qoq at 1.2m. As a comparison, passenger arrivals in 2019 were 11.6m.

Needs to Execute on Peak Orderbook

• Muhibbah won two contract wins amounting to RM479m in Nov 23, bringing YTD wins for construction to RM652m and its total construction orderbook to RM1.5bn as at Nov 23 (RM2.4bn including cranes). Contract flows have been picking up, and since 3Q22 with more Petronas driven projects and its orderbook of RM2.4bn, have exceeded Aug 2019 levels of RM1.7bn.

• While contract flows have been encouraging, the key to a sustainable re-rating of the stock price would be more solid execution and in turn earnings delivery, in our view.

• The new Siem Reap Airport, which was developed by a consortium of state-owned companies from China’s Yunnan province under a 55-year build-operate-transfer deal, started operations in Oct 23. Hence, the previous airport concession which was run by the Vinci-Muhibbah JV ended in Oct 23 and compensation has been made. Muhibbah disclosed that this amounted to US$63m. We have accounted for this in our earnings forecasts and SOP valuation.

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 - 28 Nov 2023