On a roll

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On a roll

Postby admin » Wed Jul 18, 2007 7:29 am

FOR constructions counters, there is no better way to get investors' juices flowing than to announce the award of a plump job. Muhibbah Engineering (M) Bhd confirmed this early this month when it announced the award of a RM1.1bil contract to build an expressway in the Klang Valley.

The stock, which has taken on a life of its own over the past year, continued to rally ahead after the announcement came out. Investors, no doubt, will race to price in the increase in earnings per share for Muhibbah on the back of this high-value job.

Fact is, Muhibbah has emerged a favourite among investors in recent times not least of all because of the company's exposure to two hot sectors currently – construction and oil and gas. The company also has some airport concessions in Cambodia and operates a shipyard.

ECM Libra Avenue Research came up with a report on Muhibbah on July 9 to highlight the latest development. The house maintained its buy call on Muhibbah and unchanged target price of RM8.50. At the time, the house pointed out that the stock still presented an upside potential of more than 20% from its current price.

That is no longer the case. That target price was taken out last Thursday.

Likewise, OSK Research raised its earnings estimates and target price for Muhibbah to RM7.70 from RM6.80 following the news.

To a certain extent, the project has raised confidence among analysts about the company's ability to secure civil infrastucture projects.

As OSK Research put it, much of the focus of late has been on Muhibbah's expertise in the oil and gas sector and the bids the company has put in for contracts in East Malaysia.

The latest contract award will bump up the company's order book to RM3.2bil, of which 75% will involve jobs from its construction and infrastructure division, 15% from its cranes division and the remaining 10% from its shipyard division.

On July 6, Muhibbah announced that it has been awarded a RM1.1bil contract by SKVE Holdings Sdn Bhd to build the South Klang Valley Expressway (SKVE) that would connect the Damansara Puchong Highway interchange to Pulau Indah in Klang.

The project includes bridge structure works, earthworks, ground treatment, surface drainage, road furniture, utilities relocation, drainage culverts, vehicular box culverts, street lighting at interchanges and toll plazas as well as pavement works. The job will take three and a half years to complete.

Possibly more to come

According to ECM Libra Avenue Securities, more good news could be in the offing for Muhibbah.

The company is currently bidding for about RM10bil worth of construction and infrastructure jobs and is looking at a 30% hit rate.

The research house appears pretty optimistic that Muhibbah will land two infrastructure projects in the oil and gas sector worth a combined value of about RM2bil. This will boost Muhibbah's order book by more than 50%.

ECM has factored in the latest contract award in its financial year 2008 earnings projection for Muhibbah. As such, the research house is maintaining its net earnings forecasts of RM65.5mil and RM84.8mil for FY07 and FY08, respectively. These would translate into earnings per share of 44sen and 57sen in the current and next financial years.

However, ECM notes that it would likely re-rate the stock upward if Muhibbah succeeds in bagging the projects with a combined value of RM2bil.

The company has made known its intentions to bid for storage facility contracts under the massive trans-peninsula oil pipeline project in the northern region.

The management has been quoted as saying that it would be able to bring its infrastructure and construction expertise to the table as well as offer its crane services, housed under subsidiary Favelle Favco Bhd.

The soon-to-be-announced RM44bil Petroliam Nasional Bhd-led initiative along the Eastern Corridor could also channel some work Muhibbah's way.

As things stand, Muhibbah has a good relationship with the national oil company as it has been supplying cranes on a large scale to Petronas.

Favelle, which supplies cranes to oil and gas companies worldwide, has also made some inroads in construction sectors overseas.

The subsidiary has branched out to Russia and China. It is supplying cranes for several landmark projects namely the Federation Tower in Russia and the Shanghai World Financial Centre as well as CCTV building in China.

Muhibbah's net profit grew 50% year-on-year to RM14.6mil in the first quarter to March 2007.

In the notes accompanying the financial results, the company explained that the higher profits were due to higher operating margins derived from better contract pricing and operational efficiency in its infrastructure construction, cranes and shipyard divisions during the latest quarter.

The company reported that international passenger flow at the Phnom Penh and Siem Reap airports also saw a surge in the first quarter and this helped boost its concession division's revenue and profits.

A local research house, nevertheless, has mixed feelings about Muhibbah. It concedes that the company’s earnings per share will likely get a boost and grow by more than 20% per annum thanks to the latest contract award.

Yet, what concerns the research outfit is that Muhibbah shares are already trading at a premium to its peers as the share price has risen five-fold over the past year.

It reckons that the domestic construction sector's valuations are also at its cyclical peak. As such, the focus of investors has switched from seeking surprises to execution risks.

With regards to the SKVE job, the house reckons that the profit margin for the project is likely to be very slim because the project was awarded on a tender basis.

The other aspect that remains unclear is whether SKVE has finalised its debt-raising programme for the project. The research house points out that this could determine the pace at which Muhibbah will see the money flowing in from this project.


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