Analysts cut MHB, UMW-OG target prices on lower oil price

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KUALA LUMPUR: Weak crude oil prices were among the key reasons for analysts to cut their target prices for Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) and UMW Oil & Gas Corp Bhd (UMW-OG).

For MHB, AllianceDBS Research said it would face challenges from the persisting low crude oil price coupled with increasing competition.

“The group’s current order book stands at RM1.8 billion, which represents less than 1 times book-to-bill ratio and will run down by mid-2016,” it said, adding that the order book contains two primary contracts with the Malikai tension leg platform and the SK316 central processing platform (CPP) with a 40:60 breakdown.

The research house said MHB is expected to increase its order book by the end of financial year 2014 (FY14) and the first quarter of 2015 (1QFY15), but noted that these contracts will involve “largely subcontractor roles”.

“As we expect smaller contract wins going forward and stiff competition, we have lowered our FY15 new order wins assumption to RM2 billion from RM2.5 billlion previously. As such we cut FY15 and FY16 earnings by 18% to 24%,” it noted.

On the argument of increasing competition, the research house cited that MHB had lost two major tenders in Malaysia to South Korea’s Hyundai Heavy Industries Co Ltd. It said this raised some concern as “there are few major CPP tenders” and there could possibly be a 12- to 24-month wait for new tender opportunities. Consequently, it is cutting MHB’s target price from RM2.25 to RM1.65.

Meanwhile, HLIB Research lowered its target price for UMW-OG from RM4.12 to RM3.29 due to “lower mid-term oil prices, negative sentiment and lack of sizeable contract newsflow for the upstream sector”.  It said these factors had also led it to believe that the oil and gas sector no longer commanded a premium valuation.


This article first appeared in The Edge Financial Daily, on October 28, 2014.