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Malaysia Marine and Heavy Engineering Holdings Bhd
(June 16, RM1.20) 
Maintain underperform with unchanged target price of RM1:
 MHB issued a statement on Tuesday announcing that it had secured multiple contracts recently with a total value of RM324 million.

We deem the contract within our expectations as we have factored in a RM1.1 billion contract replenishment for 2015. 

This is positive for the group, especially in this volatile period when fabrication contracts are hard to come by due to delays and cuts in capital expenditure by oil producers. Earnings before interest and tax (Ebit) margin is believed to range between 6% and 7% for the fabrication projects while we do not discount the possibility of timing difference on the recognition of revenue and profit from these projects. 

Some projects might have their profits backloaded to the later period. Notwithstanding, this indicates that Petroliam Nasional Bhd (Petronas) is slowly gearing up to award more contracts to service providers post its reorganisation due to the weaker crude oil prices,  and more awards could be seen in the second half (2H) of this year.

The current order book stands at RM1.5 billion after inclusion of the new contracts secured, spanning up to 2017. Profit contribution from most offshore business units is guided to emerge only by 2H of financial year 2015 (FY15) and FY16. The tender book of the group now stands at RM7 billion with about RM4.5 billion comprising overseas jobs and the balance in Malaysia. This is seen as an indication of the group’s effort to reduce its reliance on Petronas for fabrication jobs. We foresee pressure on its already low fabrication job margins as oil majors seek to cut costs in the midst of a more challenging oil and gas industry.

The engineering, procurement, construction and commissioning contract award for the Kasawari gas project, which was originally scheduled to be awarded in February this year, has been delayed without a deadline due to higher uncertainty over oil prices. Being one of the three shortlisted players, this job is expected to provide a huge boost to the group’s dwindling order book. For the marine repair segment, we anticipate it to be more resilient compared to the offshore division as demand for dry-docking repair and maintenance is expected to be less elastic to the changes in oil prices and industry outlook. We maintain our forecasts for now. — Kenanga Research, June 16

Malaysia-Marine_fd170615_theedgemarkets

This article first appeared in The Edge Financial Daily, on June 17, 2015.

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