KUALA LUMPUR (Aug 7): CGS-CIMB maintained its 'add' recommendation and target price (TP) of 90 sen on Muhibbah Engineering (M) Bhd after all its operations returned to pandemic levels, except for passenger arrivals at its Cambodia airports.
In a note, analyst Chong Tjen-Sa said the group’s construction and crane businesses have returned to pre pandemic levels, citing its current outstanding orderbook of RM1.7 billion (RM1billion infrastructure and RM700 million cranes and industrial automation as of May 23), which is back to 2019 levels.
However, the same optimism cannot be shared by its airport business, as passenger arrivals in the first half of 2023 stood at only 2.48 million, versus 2019’s level of 11.6 million.
Muhibbah owns an effective 21% stake in Cambodia Airports, which manages the three operating international airports in Cambodia in Phnom Penh, Siem Reap and Sihanoukville.
Cambodia airports to account for 52%-61% of group’s profit
CGS-CIMB said for FY17-19, Muhibbah’s share of profits from the Cambodian airport concessions was RM76 million-RM107 million, translating into 57%-70% of group net profit.
“Assuming a gradual recovery in tourist arrivals and removing the effect of Siem Reap, we expect its Cambodian airport concession to record RM14 million-RM38 million net profit and contribute 52%-61% of group net profit for FY23F-FY25F,”it added.
It said its target price of 90 sen on Muhibah is based on sum-of-parts (SOP) valuation whereby the 69 sen share is from its construction and crane business while the remainder is from its Cambodian airport concessions.
“While we have accounted for the potential loss of its Siem Reap International Airport concession with no compensation so far, this implies the Phnom Penh and Sihanoukville airports are free, based on the current share price of 68 sen per share,” said Chong.
Chong said that while travel demand has recovered globally since China’s border reopening, travel to Cambodia has been constrained by low flight capacity and slow visa approvals.
Nevertheless, Chong said Muhibbah is a prime beneficiary of a revival in global travel, particularly by Chinese tourists.
“We estimate the Cambodian airport concessions contributed around 57% to 70% of FY2017-FY2019 group net profit, was loss making in FY2020 and FY2021 and are likely to contribute around 52% net profit in FY2024F based on 5.7 million passenger arrivals,” said Chong.
Contract flows have picked up since 3Q2022
Meanwhile, he said that the group’s contract flows have been picking up since 3Q2022 with RM851 million worth of new orders.
This brings its infrastructure orderbook to RM1 billion or RM1.7 billion including its cranes segment, which is back at 2019 levels.
Recent wins have been mostly Petronas driven, totaling at RM678 million from three projects, said Chong.
“Another key division within its infrastructure business is CiTech, which is a supplier of waste heat recovery units (WHRUs) and the first and original patented CiBAS (concentric, integral, by-pass and silencer) compact cylindrical WHRU,” he said, with its gross margins were in the range of 20%-25% for FY2019-FY2022.
“Its current clientele is also impressive and includes Petronas Carigali, Siemens, ABB and Keppel.”
(subhead) Stock currently trading near all-time lows in 2019
He added that the group's stocks currently trade at FY2024 forecast (FY2024f) price to earnings of 10 times and price to book ratio (P/BV) of 0.4 times.
“P/E may not be an ideal valuation metric given the recovering earnings trajectory from a depressed base,” said Chong.
“From a P/BV angle, the stock is tracking near its all-time lows since 2009. This may not be justified given the return of its infrastructure and crane orderbook to pre-pandemic levels of RM1.7 billion, the improving trajectory of passenger arrivals for its Cambodian airport concession and the Petronas fabrication licence.”
At market close on Monday (Aug 7), its share price fell 1.5 sen or 2.22% to 66 sen, valuing the group at RM476.26 million.