Muhibbah Engineering banks on pent-up demand for air travel at Cambodia


MUHIBBAH Engineering Bhd is expected to post higher earnings in the financial year 2021 (FY21) and FY22 driven by an assumption of higher earnings contribution from its airport concession business and a recovery of its construction segment on higher progress billings.

MIDF Amanah Investment Bank (MIDF Research) in a note yesterday said a successful coronavirus immunisation programme globally would help determine the rate of recovery in airport traffic volume, which could enhance the group’s earnings visibility from its concession business.

“We are of the view that the outlook of its 21%-owned Cambodia Airports, which predominantly constitute up to 70% of the group’s earnings, is set to be on a gradual recovery over the next two years on the back of accelerated Covid-19 vaccination drive across the globe, especially China, the US and South East Asia,” it noted in a report.

It added that there will also most likely be pent-up demand in international air travel when borders are reopened, which will capture Chinese domestic air traffic volume.

“We postulate that this likely phenomenon will improve the air traffic volume for the group’s Cambodia airports. To note, about one-third of travellers to the airport are Chinese nationality. Therefore, the earnings recovery momentum for the group is seen to be positive moving forward, banking on the rebound in airfare growth in the region and traffic volume at its Cambodia airports,” said MIDF Research. This would also likely to rebound airfares to almost to pre-pandemic level.

Muhibbah’s construction and crane segment is also on the path to recovery based on a slew of purchase orders for offshore and tower cranes worth RM101.4 million in 1QCY21 secured by its subsidiary, Favelle Favco Bhd.

“This contributed to the group’s current healthy outstanding orderbook of RM967 million which would provide earnings visibility for the next two to three years. We also do not discount the possibility of the group to secure more jobs in the coming quarters,” noted MIDF Research.

The research outfit revised upward earnings estimates for FY21 and FY22 to RM47.8 million and RM68.6 million respectively.

“We are revising our target price to RM1.22 (previously RM0.76) after rolling our valuation base year to FY22. “This is achieved through pegging a forward price-to-earnings ratio (PER) of 8.6x to the group’s FY22 earnings per share of 14.2 sen. Note that the PER is the group’s five-year historical average,” it noted.

Muhibbah’s 4QFY20 revenue increased by 56.8% quarter on quarter to RM357.3 million as a result of higher earnings contribution from the infrastructure and concession segment.

As a result, this narrowed the group’s 4QFY20 losses to RM27.5 million compared to RM69.4 million in 4QFY19 due to a lower profit contribution from the airport concession division affected by the global Covid-19 pandemic.

Nonetheless, the group’s FY20 performance fell into losses of RM81.5 million compared to RM25.5 million normalised earnings in FY19, primarily attributable to the dismal performance of its construction segment, which led to lower progress claim, while travel restriction severely impacted its airport business activities.

“However, the loss was within our but below consensus’ expectations. Moving forward, we expect Muhibbah’s financial performance to improve in the foreseeable term on the resumption of business and economic activities which could induce air travel demand,” said MIDF Research.