ECM Libra Investment Research is positive on Muhibbah Engineering (M) Bhd, which has secured a RM109 million contract to build a central oil distribution terminal in Sarawak, but expects minimal impact from the contract on the company’s earnings for the next two years.

“While we are positive of the new job secured, which will boost its outstanding order book to RM4.3 billion, the impact to Muhibbah’s earnings in FY2009 and FY2010 is minimal at around 3%. As such, we leave our earnings estimate unchanged for now,” it said.

The research house maintained its buy call on the stock at 75 sen, with an unchanged sum-of-parts (SOP) valuation of RM1.77, saying the stock has already corrected significantly and most downside risk seems to have been priced in.

Muhibbah’s engineering, procurement, construction and commissioning contract for the central oil distribution terminal forms part of the Assar Senari Industrial Complex Dua to be built by the Assar Senari Group and Sarawak Timber Industry Development Corporation, which is a strategic project under the Sarawak Corridor of Renewable Energy (Score).

Meanwhile, HLG Research maintained its buy call on Muhibbah with a price target of RM1.30 as it was trading at a huge 70% discount to big-cap construction peers.

The research house also said the company was well-placed to benefit from government pump-priming awards with its proven track record.

“Share price has fallen 29% year-to-date, underperforming its peers by 38%, implying a valuation of just three times FY2009 PE,” it said.

HLG Research maintained its FY09 forecasts but reduced FY10 earnings per share (EPS) by 39% on slower shipbuilding and crane orders.

“However, we see upside to our FY09 EPS given that the construction division has yet to recognise some outstanding variation orders for completed local works and building material costs have normalised to 2006 levels,” it added.

The research house said Muhibbah’s current order book was able to sustain earnings until FY10. The New Doha International Airport and SKVE Expressway (to be completed in 3Q10 and 2Q11 respectively) make up 78% of current construction order book.

“We do not foresee cancellation risk from the Qatari government and works on the SKVE commenced in January this year following finalisation of project funding in 4Q08. The shipbuilding division currently has secured orders of 13 ships versus its capacity of seven ships per annum, limiting cancellation risk,” it added.

HLG Research said Muhibbah’s FY08 net profit of RM22 million was 69% lower year-on-year, and was 26% to 27% of its forecasts and the consensus’ expectations. Its 4Q08 revenue of RM804 million (+65% quarter-on-quarter, +92% year-on-year) was largely due to higher billings from construction division on recognition of LNG jetty works in Yemen.

However, the construction division made a loss of RM54 million in 4Q08 versus RM28 million earnings before interest and tax (Ebit) in the nine months ended Sept 30, 2008.

Muhibbah slid three sen to close at 72 sen yesterday