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MUHIBAH (5703) : Muhibbah Engineering - Don't touch the panic button

Target RM3.64 (Stock Rating: ADD)

The award of the regas plant in Pengerang to Samsung should not be viewed as negative for Muhibbah given that it did not bid for it. Also, the risk of delays in oil & gas infra projects in Rapid has been overplayed, in our view. Lower oil prices are negative for upstream players but net positive for downstream contractors like Muhibbah as construction costs are lower. Our EPS forecasts are intact but we cut our target price (still based on a 20% RNAV discount) as we update for Favelle Favco's lower market cap. We view today’s 11% fall in Muhibbah’s share price as a buying opportunity. The stock now trades at an undemanding FY15-16 P/E of 9-10x. Muhibbah remains an Add and our preferred small/mid cap pick, with job wins as a catalyst.
 
What Happened
Muhibbah's share price fell 11% today on high volume. Our checks showed that there are concerns that Muhibbah's tenders for Rapid contracts are at risk of delays as the group did not win the new regasification project in Pengerang. After talking to management, we think that the market is overly concerned. It is business as usual and potential awards are likely in the short term.

What We Think
We were surprised by the selldown, which could have spilled over from investors’ general concern over the impact of the decline in oil prices on upstream pure oil & gas players. The fact that Muhibbah did not benefit from the award of the regas plant in Pengerang should not be a major concern as 1) the group did not tender for the job, and 2) Pengerang and Rapid are two totally different tender areas. Management clarified that the group's tenders in Rapid for more than one refinery subcontract works remain intact. We expect it to land a contract in the short term, worth up to RM500m based on a recent article in The Edge Weekly. Muhibbah could be in the running for up to c.RM1bn worth of projects in Rapid. This excludes new infra tenders in Pengerang which have emerged in the last 2-3 months.

What You Should Do
We recommend that investors accumulate the stock, which has been oversold. Its foreign shareholding has fallen from a peak of 18% two months ago to about 12% currently. Investors should not disregard Muhibbah's improved infrastructure contract wins YTD of RM378m (see overleaf). Other new packages are likely to be larger. Infra wins are also supported by the RM435m total new crane orders from Favelle Favco.

Source: CIMB Daybreak - 18 November 2014
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