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Wednesday, November 30, 2016

Brokers Report: Muhibbah Engineering (M) - 9M16 Below Expectations

Retain outperform with lower target price (TP) of RM2.48

9M16 CNP of RM62.1m was below expectations, accounting for 68%/59% of our/streets? full-year estimates, respectively. The negative deviation was due to lower-than- expected operating margin stemming from the provisioning on its crane division coupled with a higher- than-expected contribution to its non-controlling interest. No dividend declared as expected. FY16-17E CNP was lowered by 7%-6%. No changes in call OUTPERFORM but lowered TP to RM2.48 (previously, RM2.53).

Below expectations. 9M16 CNP of RM62.1m came in below expectations, making up only 68% and 59% of our and streets? full- year estimates, respectively. We believe the negative deviation was due to lower-than-expected operating margins mainly driven by the provisioning incurred on its crane division coupled with a higher-than- expected contribution to its non-controlling interest. No dividend was declared, as expected.
Result highlights. YoY-Ytd, 9M16 NP saw an improvement of 12%, but its CNP registered a sharp decrease of 33% after excluding the net impact from the movement in forex and derivatives, albeit a healthy top line growth of 9%. The decline in CNP is mainly attributable to the compression in pre-tax margins for both its crane and shipyard division that was down by 3-6ppt to 14-15%, respectively.

QoQ, 3Q16 CNP fell by 64% underpinned by the 5% decrease in revenue. It registered a weaker performance for 3Q16 owing to lower billings recognised due to timing factor coupled with a higher provision for warranties coupled with a lower contribution from associates which saw a decline of 14%.

Outlook. Currently, MUHIBAH?s outstanding order book stands at c.RM1.7b, providing the group at least two years of visibility. To date, they only managed to secure c.RM320.0m vis-a-vis our FY16E target of RM1.0b. In the medium-to-near term, MUHIBAH?s focus remains unchanged on RAPID while bidding for MRT2 and other infrastructure jobs like LRT3, which would be sufficient to make up to our RM1.0b target. That said, we also expect MUHIBAH to register a better 4Q16 as we do not expect more provisioning from its crane division coupled with a stronger contribution from its associates in 4Q16.

Earnings downgrade. Post results, we revised our FY16-17E core earnings down by 7% and 6%, respectively, after we tweaked our operating margins lower coupled with a higher contribution to its non- controlling interest.

OUTPERFORM maintained. Post revision in our FY16-17E core earnings, lowered our SoP-driven Target Price to RM2.48 (previously, RM2.53) while maintaining our OUTPERFORM call on the stock as we still believe that they remain as one of the strong contenders in the construction industry, especially for infrastructure jobs. Our Target Price of RM2.48 implies FY17E PER of 11.5x. This TP is in line with our target small-and-mid caps construction peers? range of 9.0?13.0x.

Source: PublicInvest Research - 30 November 2016

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