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Monday, October 20, 2014

Muhibbah Engineering - Getting Rapid-ly warmer?


Target RM3.89 (Stock Rating: ADD)

An Edge Weekly article highlighting Muhibbah's chances of securing a RM500m job in Rapid by year-end reinforces our expectations for the company's infra order back log, hence the news is not too surprising. We maintain our assumptions for RM600m infra job wins for FY14 and RM1bn for FY15, driven by domestic oil & gas infra. Muhibbah's latest Samalaju Port expansion project speaks volumes of the group's competitiveness and expertise in the segment. We raise our RNAV-based target price (still a 20% discount) as we roll over our valuations. Maintain Add. The stock has dropped 17% from its peak in Jul 14 due to the global sell-down - a buying opportunity. Muhibbah is still our preferred mid-cap pick. Job wins are potential catalysts.

What Happened
Over the weekend, Edge Weekly quoted sources as saying that Muhibbah was set to secure a RM500m civil and mechanical package in Rapid. The group appears to be in final negotiations with Technicas Reunidas SA, the foreign EPCC contractor for a refinery and steam cracker component in Rapid.

What We Think
This news is positive but not too surprising as it supports our expectations about the group's prospects in Rapid. Muhibbah's infra awards YTD have picked up since 1H14, with the latest job being the RM157m Samalaju Port development in Sarawak. However, the group has yet to secure any contracts in Rapid, from which we expect it to win around RM1bn worth of jobs over the next 12-18 months, based on a 20-30% success rate. We believe that it is about time that such leads as presented by the article surface as it is a good indicator that the award stage is near. If this materialises, it will bring the group's infra order book to over RM1bn and its total group order book (cranes and shipyard) to around RM2.5bn. We expect Muhibbah to also be in the running to secure other specialised job packages from other foreign EPCC players there.

What You Should Do
Accumulate the stock as news flow could be active going into the year-end and 2015. The share price has declined 17% from its peak of RM3.48 in Jul 14 given the recent sharp drop due to the global equities sell-down, which spilled over to domestic small-/mid-cap stocks. However, the group's fundamentals remain unchanged, if not better, as vindicated by the article. We expect the stock to continue to re-rate in the short term.

Source: CIMB Daybreak - 20 October 2014, Full PDF Report

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