While a loss this quarter was anticipated, we deem 1HFY20 core net loss (CNL) of RM20m below ours and consensus expectations as we anticipate a longer than expected recovery for its Cambodian airports and persistently weak construction contributions ahead. Cut FY20E/FY21E earnings by 91%/20% but maintain OUTPERFORM with lower TP of RM1.05, given the attractive valuations.

Below expectations. 2QFY20 core net loss (CNL) of RM23.1m dragged 1HFY20 into a CNL position of RM20m missing both ours and consensus profit estimates of RM27m and RM62m respectively. While a loss was largely expected this quarter due to Covid-19, results are deemed below because we feel that Muhibah is unlikely to recover as strongly in 2H20 to meet our initial full year targets due to (i) volatile profits from its construction division and (ii) longer-than-expected recovery from the travel industry. No dividends announced as expected.

QoQ, 2QFY20 plunged into a loss of RM23.1m (from profits of RM3.1m in 1QFY20) as the longer lockdown period of two months’ vs two weeks had dragged (i) its construction loss before tax (LBT including eliminations) deeper into a red of RM35m vs RM11m and (ii) meagre passenger count of 68k vs 1.9m caused its airport concession to record LBT of RM7.8m from a PBT of RM17m.

YoY, 1HFY20 sank into the red to a CNL of RM20m mainly due to the Covid-19 impact resulting in weaker associate contributions (-93%) from its 21%-owned Cambodian airports which saw passenger traffic plunging to 1.95m (-68%). Its construction division which registered losses before tax (to the tune of RM46m, after accounting for eliminations) also contributed to the overall drop.

A slow recovery ahead. The strict rules imposed on tourists in Cambodia has crippled the travelling industry. To name a few: travellers are required to do a Covid test proving they are negative 72 hours prior to entering Cambodia and mandated to go under a 14-day quarantine upon arrival. With Covid-19 vaccine still unavailable at this juncture, it is unlikely for the travel industry to be revived for the rest of 2020. Current order-book of RM1.2b provides visibility for a year.

Earnings cut. Post results, we cut our FY20E/FY21E CNP by 91%/20% after factoring: (i) larger losses of RM45.5m/RM21.5m for its construction division (vs. losses of RM20m/RM10m), and (ii) lower FY20 passenger traffic of to 2.5m (from 5m) for its Cambodian airports

Valuations just too appealing. Despite the huge slash in earnings coupled with the fact that MUHIBAH’s airports are direct victims of the Covid-19 pandemic, we find valuations just too attractive at this juncture. Hence, we maintain OUTPERFORM but with a lower SoPbased TP of RM1.05 (from RM1.15) on lowered construction BV (of 0.2x from 0.375x). Timing wise, we think share price could react positively when a Covid-19 vaccine is found which is a precursor for a recovery of the travel industry.

In our SoP, we have: (i) ascribed a -2.5SD PBV (lowest in our universe) to its construction division due to the volatile profits, (ii) fully omitted Phnom Penh airport from the concession valuation, and (iii) only value FAVCO at RM1.84 (vs current share price of RM2.09). Yet, our conservative TP of RM1.05 still provides 27% upside from current level.

Risks to our call include: (i) lower-than-expected order-book replenishment target, (ii) delays in construction progress, and (iii) sharp spike in raw material costs.

Source: Kenanga Research - 1 Sept 2020