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This article first appeared in The Edge Malaysia Weekly on May 14, 2018 - May 20, 2018

THERE is a fair amount of uncertainty about the fortunes of marine and heavy engineering service provider Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE).

The concern stems from a shrinking order book, which may see the company go through a difficult patch in the next couple of years at least.

MMHE is 66.5%-controlled by shipping giant MISC Bhd, which, in turn, is a 62.67% subsidiary of national oil company Petroliam Nasional Bhd (Petronas).

The stock closed at 76 sen last Wednesday while its net asset per share as at March 31 was RM1.57.

Analysts are divided on the stock’s prospects, although some of them have a “buy” call on it based merely on its low valuation.

In email replies to questions about a dearth of jobs, MMHE says, “The sluggish upstream sector remains a concern to us. We are closely monitoring the situation and have implemented initiatives to stay resilient, which include diversifying into other areas. Currently, we continue to focus on managing cost, optimising resources and improving operational efficiencies to stay competitive.”

It is not known what initiatives MMHE has implemented, but the company’s financials released early this month were uninspiring, to say the least. In its first quarter ended March 31, 2018 (1QFY2018), MMHE suffered an after-tax loss of RM25.27 million on revenue of RM188.27 million. In the corresponding period a year ago, it posted a net loss of RM16.61 million on sales of RM235.84 million.

One of the core issues for the company is replenishing its RM1.3 billion order book, a chunk of which comprises fabrication work amounting to about RM1 billion for the Bokor central processing platform (CPP).

To recap, MMHE was awarded the RM1 billion contract in April last year to undertake the engineering, procurement, construction, installation and commissioning of an offshore CPP for Petronas’ Bokor Phase 3 redevelopment project, located in the Baram Delta off Sarawak.

The first steel for the CPP is expected to be cut in the third quarter of this year while the project is slated for completion in the second quarter of 2020.

MMHE says the aforementioned RM1.3 billion will last the group until 2020.

In a report released last week, TA Securities analyst Kylie Chan Sze Zan says MMHE secured merely RM4 million worth of orders in 1Q2018 — far lower than the burn rate of its order book.

In the notes accompanying its financials, MMHE says replenishing the order book of its marine and heavy engineering segments remains the priority. It adds that while the steady increase in global crude prices may result in a recovery in oil and gas spending in the coming years, “this is unlikely to translate into immediate opportunities in 2018”.

“The group is committed to its strategy of expanding into new business segments in oil and gas services to ensure sustainability of income.”

As at March 31, MMHE had cash and bank balances of RM514.56 million and negligible borrowings, putting it in a good position.

On whether the company is looking at diversifying — using some of its cash pile — the spokesperson says, “Our cash holding is mainly for our working capital. However, if a good opportunity arises that can enhance our value proposition, we will consider it.”

MMHE’s core businesses include heavy engineering, for which the company has two fabrication yards of about 450 acres in Johor with 2km of seafront, and 450 acres of yard space. Another traditional business is ship repair and dry docking.

It is noteworthy that MMHE is building its third ship-repair facility at a cost of RM500 million, which should be ready by 2020. “The construction of the third dry-dock facility named Dry Dock 3 is currently 15% complete and is on track to commence operation in 2020,” it says.

According to MMHE, while parent MISC, which has a fleet 120 ships, is a major client, the company managed to secure 26 new clients, both local and international, last year.

 

What the analysts say

Analysts have differing calls on MMHE. For instance, TA Securities’ Chan has a “sell” call on the company with a target price of 81 sen, representing a five-sen premium to its close of 76 sen last Wednesday.

In a report on MMHE’s results, Chan says, “For the first time since listing (in October 2010) both the heavy engineering and marine segments reported operating losses in 1Q2018.”

TA Securities lowered its FY2018-FY2020 forecasts by 17%-127% after accounting for lower marine vessel repair jobs. It sees the company suffering a net loss of RM2.1 million on revenue of RM887.5 million in FY2018.

However, the research house sees MMHE chalking up a net profit of RM17.1 million on revenue of RM1.33 billion in FY2019.

AmInvestment Bank’s Alex Goh has a “buy” call on the stock and pegs a fair value of RM1.13 to it based on a 30% discount to its FY2017 book value, “underpinned by a rising momentum of offshore job prospects globally against a backdrop of an improving oil price outlook”.

AmInvestment says MMHE’s 1HFY2018 results will be weak, given that its yard utilisation remains below its break-even point of 50% as many of its previous projects, such as SK316, Bergading and Baronia CPP, have been completed while existing projects have yet to reach the stage of profit recognition.

“The stock is trading at a compelling price-earnings ratio of 0.5 times, given the receding risk of further impairments amid brighter tendering prospects, together with attractive dividend yields of 4%,” Goh says in a note released earlier this month.

Nevertheless, while MMHE, at 76 sen, is trading at around its lowest levels since its listing in October 2010, a fund manager says there is a stigma attached to MMHE’s execution capability. Does the stigma alone warrant such a large discount on the company?

 

 

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