FY13 Final Results Update 3 March 2014 Muhibbah Engineering (M) Bhd Final results above forecast Strong potential for more Petronas, Middle-east jobs RM1.8b order-book, oil & gas focus to underpin growth Attractive valuations at P/E of 10.2x and 9.1x for 2014-15 Share price RM2.40 Market capitalization RM1,014 million Board Main BUY Key stock statistics FY Dec13 FY Dec14E EPS (sen) 20.7 23.6 P/E (x) 11.6 10.2 DPS (sen) 4.5 5.0 NTA/share (RM) 1.33 1.51 Issued capital (mil) 422.4 52-week price range (RM) 0.80-2.72 Major shareholders (%) Mac Ngan Boon 23.4% Lembaga Tabung Haji 9.9% Share Price Chart Indices FBM Emas Syariah, Sector Construction Stock code 5703 3.00 2.50 2.00 1.50 1.00 By The Research Team 0.50-2-Jan-13 07-Jan-14
FY13 Final Results Highlights Year end Dec (RM mil) FY13 FY12 % chg Turnover 1,899.8 2.625.5 (27.6) Pre-tax profit 134.0 (35.0) NM Tax (19.1) (26.1) (26.9) Minority interests (29.7) (32.2) (7.6) Net profit 85.2 (93.2) NM EPS (sen) 20.7 (22.9) Pre-tax profit margin (%) 7.1 NM Net profit margin (%) 4.5 NM Muhibbah Engineering s full year results for 2013 were better than our expectations, and marked a strong turnaround from 2012 when the company fell into the red due to provisions for the Asia Petroleum Hub (APH) project. Full-year pre-tax profit came in at RM134 million, 8% above our forecast of RM124 million, while net profit of RM85.2 million was 20% above our original forecast of RM71.2 million. By comparison, the group posted pre-tax and net losses of RM35 million and RM93.2 million, respectively, in 2012 due to provisions for APH. Revenue for 2013 declined 27.6% from RM2.63 billion to RM1.9 billion. Notwithstanding the better overall performance due to the absence of one-off APH provisions, we estimate EBITDA in 2013 declined 23.4% from RM236.2 million to RM180.8 million, although overall EBITDA margins improved from 9.0% to 9.5%. This was largely due to the 27.6% drop in revenue following the completion of several large projects, notably the South Klang Valley Expressway, as civil works typically yield lower margins. Share of associates increased 5.3% from RM44.2 million to RM46.5 million, reflecting continued growth in its concession business, notably the Cambodian airports and Malaysian road maintenance concessions. As at 21 Feb 2014, Muhibbah s outstanding order-book stood at RM1.83 billion, down 14% from RM2.13 billion in November 2013. This comprised RM719 million from infrastructure construction, RM1.064 billion from cranes and RM47 million from shipyard. Of this, 27.7% are in Malaysia and the rest overseas, a testament to the group s growing international stature. A first and final dividend of 4.5 sen has been proposed, giving shareholders a yield of 1.9%. 2
Outlook and recommendation We maintain our BUY recommendation on Muhibbah. We like the group s broad-based growth in its various business segments, rising international stature and its growing focus on the oil and gas sector, making the stock a good proxy to the sector s buoyant growth. The group s more cyclical earnings from infrastructure construction, cranes and ship-building are complemented by stable concession income from the airports in Cambodia and road maintenance contract in Malaysia. Muhibbah s earnings will be underpinned by its RM1.82 billion order book, of which 60% is for oil and gas related projects. The crane unit, Favelle Favco, in particular is seeing strong growth in order-book and earnings, with 30% growth in net profit to RM61.7 million in 2013. We expect Muhibbah to post net profit of RM99.7 million in 2014 and RM110.8 million in 2015, with EPS of 23.6 sen and 26.2 sen, respectively. At RM2.40, the stock s P/E valuations of 10.2 times for 2014 and 9.1 times for 2015 are attractive, especially relative to its growth prospects, oil and gas and construction peers, and as lower-cost proxies to the oil & gas sector. As a comparison, large cap oil & gas stocks like SapuraKencana Petroleum and Bumi Armada are currently trading at about 20 times earnings for 2014, while smaller ones like Perisai Petroleum are at 16 times. Meanwhile, most major construction stocks are trading at around 12 times earnings for 2014 although those with property divisions will likely see a dip in earnings in 2015 with the current property slowdown. Among Muhibbah s major outstanding contracts are the Wiggins Island Coal Terminal Export Project in Australia (outstanding order-book RM192 million), noise barriers and enclosures for MRT Corp (RM147 million), catering facility for the new Doha International Airport (RM105 million), government buildings in Putrajaya (RM47 million), refurbishment of the terminal buildings at Phnom Penh and Siem Reap airports (RM83 million) and steel structure works for the Petronas LNG 9 project in Sarawak (RM30 million). Going forward, oil & gas projects are likely to feature more with the award to Muhibbah in June 2013 of a license by Petronas as an Approved Supplier for the Category of Offshore Facilities Construction Major Onshore Fabrication. With its complete package of capabilities in building ships, cranes, fabricated structures, pipelines, terminals, tanks and other related works, the group is positioning itself to garner a larger slice of the national oil company s capex. Petronas is expected to spend RM300 billion in capex over the next 5 years. 3
For the oil & gas sector in 2014, some of the factors that will spur spending include: (1) the award of new risk-sharing contracts, (2) more enhanced oil recovery projects, (3) contracts for drilling rigs to local contractors and (4) the RM60 billion Refinery and Petrochemical Integrated Development (RAPID) Petrochemical Complex in Pengerang, Johor. There have recently been reports that the RAPID project may not meet its final investment decision deadline of March 2014, although the delay is due more to resettlement issues rather than financial viability. Reflecting Muhibbah s increasing global status and its ability to clinch major overseas projects, only 28% of its order-book are currently for Malaysian projects. This buffers the company against a slowdown in domestic construction activities where competition and margins have been tight. The group hopes its two projects in the Middle East the earlier completed Yemen LNG project and the ongoing Doha International Airport catering facility will open the doors to more projects in the region. Qatar in particular, is investing heavily in infrastructure. On the APH front, there have been no new developments. Any move to revive or restructure the project will benefit Muhibbah in the future in terms of write-backs, as some RM240 million in full provisions were already made in 2012. Meanwhile, Muhibbah s Cambodian airport operations offer an attractive exposure to Cambodia s economy, with GDP growth of 7.2% to 7.5% per year until 2015, supported by the strong tourism and textile industries. The airport operations are 30% owned through a joint venture with the French Vinci group, and the concessions last until 2040. In 2013, the Phnom Penh and Siem Reap airports combined registered 18% growth in total passenger arrivals to 5.07 million, following an already strong 17% growth in arrivals to 4.3 million in 2012. The Phnom Penh airport saw a 15% growth in arrivals to 2.39 million while the Siem Reap airport s arrivals rose 20% to 2.66 million. Future growth will come from expansion of the two airports, as well as increased flights at the new third airport concession in Sihanoukville, the gateway to southern Cambodia s beaches and islands, textile manufacturing base and newly discovered oil and gas deposits. 4
Profit & Loss Analysis Year end Dec (RM mil) 2012 2013 2014E 2015E Turnover 2,625.5 1,899.8 2,280.0 2,550.0 EBITDA 236.2 180.8 214.4 234.8 Depreciation (45.5) (53.7) (56.0) (59.0) Associates 44.2 46.5 52.0 58.0 Interest income/(exp) (31.5) (39.6) (38.0) (38.0) Exceptional items (238.5) Pre-tax profit (35.0) 134.0 172.4 195.8 Tax (26.1) (19.1) (39.7) (48.9) Minorities (32.2) (29.7) (33.0) (36.0) Net profit (93.2) 85.2 99.7 110.8 Operating margin (%) 9.0 9.5 9.4 9.2 Pre-tax margin (%) NM 7.1 7.6 7.7 Net margin (%) NM 4.5 4.4 4.3 Effective tax rate (%) NM 14.2 23.0 25.0 Per Share Data Year end Dec 2012 2013 2014E 2015E EPS (sen) (22.9) 20.7 23.6 26.2 P/E (x) (10.5) 11.6 10.2 9.1 Dividend (sen) 2.5 4.5 5.0 5.0 Dividend yield (%) 1.0 1.9 2.1 2.1 Payout ratio (%) NM 21 21 19 Book value (RM) 1.12 1.33 1.51 1.72 Price/Book value (x) 2.14 1.80 1.59 1.39 Cashflow/share (sen) 43.9 30.0 32.4 35.0 Price/Cashflow (x) 5.5 8.0 7.4 6.9 Gearing %* 151 110 94 83 ROE (%) NM 15.2 15.6 15.2 * including bills payables 5
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