This article first appeared in The Edge Financial Daily on January 10, 2019
Malaysia Marine and Heavy Engineering Holdings Bhd
(Jan 9, 65.5 sen)
Maintain hold with an unchanged target price (TP) of 55 sen: Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) secured a frame agreement from Petroliam Nasional Bhd (Petronas) for the provision of engineering, procurement and construction (EPC) of fixed offshore structure works. The agreement was awarded to MMHE’s wholly-owned subsidiary Malaysia Marine and Heavy Engineering Sdn Bhd. The six-year agreement consists of two packages, which are Package A — Fixed offshore structures of weight exceeding 7,500 tonnes, and Package B — Fixed offshore structures of weight not exceeding or equal to 7,500 tonnes.
Overall, we are neutral on this news as MMHE has already been one of the main fabricators for Petronas’ petroleum arrangement contractors (PACs). Such an agreement is similar to the long-term offshore agreement signed with Saudi Aramco earlier on.
Packages A and B are applicable to projects being managed by Petronas’ PACs for all oil and gas blocks within Malaysia and are subjected to mini bidding. MMHE will have to compete with other fabricators such as Sapura Energy, KKB Engineering, Muhhibbah and Brooke Dockyard for actual work orders. Margins could still be under pressure given that Petronas is still in a tight cautious spending mode.
According to the Petronas Activity Outlook 2019-2021, Petronas has indicated fabrication work of one to two wellhead platforms (WHPs) and one to two central processing platforms (CPPs) to be awarded this year and subsequently increasing to six to 13 WHPs in 2020. The mini bids will be out by batches depending on the PACs’ working schedule.
We make no changes to our earnings forecasts as we have already imputed RM800 million and RM1 billion order-book replenishment assumptions in financial year 2019 (FY19) and FY20.
Our TP remains unchanged at 55 sen pegged at 0.35 times FY19 price-to-book value. All in, we maintain our “hold” rating as near-term earnings weakness is likely to be cushioned by strong balance sheet (net cash position of 37 sen/share). — Hong Leong Investment Bank Research, Jan 9