Muhibbah’s Master stroke 

MUHIBBAH Engineering (M) Bhd, a company known for its growth through strategic mergers and acquisitions (M&As), is once again on the acquisition trail.

Cash rich and bouncing back from Covid-19, the engineering services provider recently raised its stake in Master-Pack Group Bhd to 31%.

Muhibbah first emerged as a shareholder in the corrugated cartons and wooden packaging manufacturer in 2022, acquiring an 8.1% stake.

Muhibbah’s recent increase of its stake in Master-Pack came about when its wholly-owned subsidiary ITS Konsortium Sdn Bhd, acquired 12.54 million shares in Master-Pack on March 25 and 26.

Interestingly, Muhibbah says it bought those shares from the open market. Usually, such large blocks are traded off-market among particularly large holders of the stock.

Muhibbah’s acquisition from the open market led to Master-Pack’s share price hitting an all-time high on March 25.

Muhibbah said it paid RM54.65mil cash for the 22.9% stake, translating to RM4.36 per share. That price works out to a historical price earnings multiple of 13.2 times.

However, it should be noted that in line with the overall market sell-down this week, Master-Pack’s share price is now at RM3.04 a share.

Why is the interest in Master-Pack given its business is far removed from Muhibbah’s core engineering operations? Also, while Master-Pack shares had a good run, investor sentiment was lukewarm for Muhibbah.

Explaining the rationale in its stock exchange filing, Muhibbah says the acquisition will widen its earning base and generate an “additional stream of recurring income through equity accounting of Master-Pack’s financial results and dividend income”.

Notably, Master-Pack has been consistently profitable, even during the pandemic, and is also in a net cash position. For the financial year ended Dec 31, 2024 (FY24), it posted RM18.2mil in net profit on a revenue of RM155mil.

The company’s packaging plants are in Penang and Kuching, Sarawak. It also has a plant in Vietnam.

According to an analyst, interest in corrugated cartons has been rising due to the growth of eCommerce. In the context of sustainability, corrugated packaging is often regarded as an eco-friendly option due to its recyclable and biodegradable properties.

The business though is highly competitive, which could compress margins, he adds.

Over at Muhibbah, the nature of the infrastructure business can be “lumpy” with periods of high demand followed by quieter times.

Analysts note that the group’s total order book has been declining from the recent peak, implying some urgency to replenish job flows.

As of February 2025, the group’s total order book for its construction and crane division stood at RM1.1bil – down from RM1.4bil in November 2024 and the RM2.4bil secured in November 2023.

Muhibbah’s presence in the crane business is through 64.5%-owned Favelle Favco Bhd, which it acquired in 1995.

While contracts are slowly coming its way with Favelle Favco having bagged five crane deals worth RM147.1mil about a fortnight ago, analysts say the group needs to clinch more sizeable contracts in the financial year 2025 (FY25), notwithstanding the RM47mil net profit in 4Q24 which beat expectations.

This is one of the factors weighing on investor sentiment, resulting in a one-fifth drop in share price over the past three months to 63.5 sen as off the first week of April.

The sell-down in the market this week following Trump’s reciprocal tariffs pushed its price lower to 52 sen at the time of writing.

CGS International (CGSI) notes that one of the projects Muhibbah was vying for was the engineering, procurement, construction and commissioning (EPCC) award for the Lang Lebah gas field, off the coast of Miri Sarawak. But this project has been deferred. 

“Nonetheless, we understand from the company that there will be fresh tenders from PETRONAS by 1H25.

“Given its prior experience with similar projects in Gansar, Bekok and Bindu in Terengganu, we think Muhibbah is in a good position to clinch such projects,” CGSI says in a recent report.

It adds that the crane division is awaiting the result of some tenders for the supply of tower cranes for the world’s biggest construction project known as Neom in Saudi Arabia.

The other issue clouding Muhibbah’s prospects is the future of the Phnom Penh airport concession, which remains uncertain.

Muhibbah owns a 21% effective stake in Cambodia Airports, which manages the Phnom Penh and Sihanoukville airports in Cambodia.

Recall that the entity also used to manage the Siem Reap Airport but it was surrendered to the Cambodian government in October 2023.

A compensation of US$64mil was paid to Muhibbah, bolstering its cash holdings which totalled RM565.35mil as of end-December 2024. This is higher than the stock’s RM464mil market cap.

Debt, meanwhile, stood at RM424.35mil. It was reported last year that negotiations were ongoing with the Cambodian authorities in relation to the Phnom Penh airport concession, which analysts say would likely include compensation and possibly new operating rights for the Techo International Airport in Kandal province. Reports indicate that Phase 1 is set to begin operations in July 2025.

However, there is still a lack of clarity on the resolution.

Operations-wise, the Cambodia airport profits are back above pre-Covid-19 levels driven by higher passenger arrivals. CGSI notes that passenger arrivals for the Phnom Penh airport and Silhanoukville airport concessions rose 20% y-o-y to 4.8 million. China passengers made up one-quarter of total passenger arrivals versus 18% in FY23 and 61% in FY19.

Pre-tax profit for the group’s crane business rose 68%.

All in for FY24, Muhibbah’s core net profit was RM78mil, reversing the losses of the previous year.

Going forward, some do not discount Muhibbah undertaking more M&As considering its cash pile.

As to whether it will raise its stake further in Master-Pack remains to be seen.

Currently, the group’s 31% stake trails closely to that of Yayasan Bumiputera Pulau Pinang Bhd, which holds a 32.47% stake in the corrugated carton manufacturer.

Crossing the 33% ownership threshold would trigger a mandatory general offer unless an exemption is obtained from the regulator.

Coming back to Muhibbah, amid concerns over its dwindling order book and lack of clarity on the continuity of the Phnom Penh airport concession, CGSI has lowered the stock’s target price from RM1.34 to RM1.10.

However, the “buy” call remains.

At the current level, Muhibbah’s price-to-earrings ratio stands at 6.8 times, which is below the construction industry average of 17.1 times, says GGSI.

Low-profile entrepreneur Mac Ngan Boon has a 20% interest in the group.