Muhibbah Engineering: Fast-growing Cambodian airports provide solid recurring income

Business Profile

Muhibbah Engineering, a Bursa Malaysia listed company is involved in construction, fabrication of cranes and shipbuilding. These three core divisions cater largely for the O&G sector. In addition, it also holds a 21% stake in two concessions, namely 3 Cambodian airports and Federal road maintenance in Malaysia.

Concessions Division

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All the three Cambodia international airports – Phnom Penh International Airport, Siem Reap International Airport and Sihanoukville International Airport saw accelerated growth at an average rate of 26% year-on-year. Last year, the airports in Phnom Penh, Siem Reap and Sihanoukville received a combined 8.8 million passengers, a 26 percent year-on-year increase. At the same time, cargo shipments grew by almost 40 percent to a record 65,000 tonnes.

Over the last few years, there have been continuous increase in the routes development and growth in air traffic volume with a wide range of airlines from different market and countries across various continents. In 2017, international airlines such as Emirates, Malindo Air, Vietjet Air, Thai Smile Airways, new Chinese carriers such as Shenzhen Airlines, Hainan Airlines, Spring Airlines, China Express as well as new domestic airlines such as JC Airlines and Lanmei Airlines offer new flights to Cambodia Airports. We also saw new offerings from cargo carriers such as Etihad and Qatar Cargo.

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The contribution from its Concession Division has increased from 47% in 2016 to 55% in 2017 of the Group’s pretax profits. In 3Q18, the division increased its pretax profits contributions to 61%.

Construction and Engineering Division

The construction business is involved in three core areas:

i) Civil engineering

ii) Marine-based construction

iii) Offshore and onshore fabrication works – where its Petronas licence offers an advantage.

Among the notable projects delivered in 2017 are the new domestic terminal of the Phnom Penh Airport in Cambodia, fabrication works for Ophir Development Project, temporary construction facilities and accommodation camp for PETRONAS’ Refinery and Petrochemicals Integrated Development Project in Johor, marine works at Port Klang for Northport (Malaysia) Bhd and Samalaju Port Development in Bintulu, Sarawak.

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The group is also involved in projects with government related corporations such as Tenaga Nasional, Prasarana Malaysia Berhad and MANATEQ (Qatar).

Crane Division

Although the crane business is not the biggest contributor of revenue, the division provides a steady cashflow  of recurring income in the rental markets.

A significant portion of revenue from the crane business comes from its subsidiary, Favelle Favco Berhad, which it owns 59.28%. Despite the challenging outlook in the current market, Favelle Favco has an order book of approximately RM515 million as at 21 November 2018 from the global oil and gas, shipyard, construction, wind turbine industries and intelligent automation.

Outlook and Quarterly earnings report

With a fast-growing airport concession business contributing more than half of its bottom line and 80% of its crane business still coming from overseas markets, Muhibbah is becoming less of a domestic infrastructure company.

9M18 results were in line with expectations. As at 28 November 2018, the total outstanding secured order book for construction and cranes division is RM1.8 billion.

Revenue grew 3.4% yoy, driven by all divisions. 9M18 EBITDA margin stood at 11.7% vs 9M17: 11.5. Overall 9M18 core net profit grew by 12.4%, boosted by the 67% yoy growth mainly from its Cambodian airport concessions.

The concession business continues to anchor Muhibbah’s profits and provide solid recurring income. Its pretax profits contributions rose to 61% from 9M17: 58% as traffic growth remains strong at Phnom Penh (+21.6%) and Sihanoukville (+73%) respectively.

In 3Q18, they handled 2.4 million passengers, +16.4% increase compared with the same period in 2017. The 4Q of the calendar year is typically a strong quarter due to the year-end festivities.

The division also benefitted from the stronger US$ vs. RM in 3Q18, which earns profits in US$. Cambodia Airport, the dedicated airport manager for Phnom Penh, Siem Reap and Sihanoukville airports, has allocated $2 billion to develop the airport network by the end of its concession period in 2040. Part of this investment has been planned to renovate the airport runway to handle more traffic in future.

Thus far, the market has yet to fully appreciate its unique business model with varied construction expertise and strong recurring income. DBS research estimates its 21% stake in the Cambodia airport concession to be worth conservatively RM734m (DCF, WACC 10% and average passenger traffic growth of 5.9% p.a. until 2040), which is already about half of the stock’s market capitalisation.

In 3Q18, Favele Favco booked in maiden contributions (revenue: RM26m, pretax profit: RM10.3m) from the 70% stake in Intelligent Automation Group (IAG).

The 3Q18 balance sheet looked healthy, with a 28% surge in cash to RM582m in 3Q18 from RM457m in 2Q18. Muhibbah trades at an attractive P/E of 8-9x, which overlooks its lucrative airport concession earnings, and ROEs of 13-14%.

Potential catalysts – Stronger growth for its Cambodian airport concession, likely to be the catalyst and continue to deliver strong earnings. Additionally, potential synergies post the completion of the industrial automation companies for its crane, construction and concession business could provide another leg of growth. A pick-up in oil and gas activities could see a resurgence in demand for offshore cranes for Favelle Favco.

Risks – Delays in project flows and sudden spikes in raw material costs could dampen its earnings outlook. Downside risks are sudden dip in concessions earnings and lower contract wins in 2019.

Top 20 Deep Value (1)

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