Malaysia Marine and Heavy Engineering Holdings Bhd
(June 8, RM1.28)
Upgrade to hold with a higher target price of RM1.33 from RM1.11: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) order book replenishment remains challenging with order book shrinking from RM1.6 billion in the fourth quarter of financial year 2014 (4QFY14) to RM1.2 billion in 1QFY15. 

Some big projects have been delayed by a year.

With MISC Bhd’s vice-president Abu Fitri Abdul Jalil (pic) taking over as the new chief executive officer in March, MHB has secured several offshore and marine maintenance contracts worth a total of RM300 million. 

Near-term outlook for fabrication remains uncertain as the plunge in oil price has delayed capital expenditure spend and increased margin squeeze due to intense competition. 

The utilisation rate for the yards has fallen from 75% to 50% given the lack of bigger job orders as existing old projects were completed.

MHB is bidding for more than RM7 billion worth of contracts, the majority from overseas (RM4.5 billion) and the remainder from Malaysia (RM2.6 billion). 

Overseas markets it will focus on are the Middle East, Canada and Africa. Potential local contracts comprise the RM1.5 billion Kasawari central processing platform, contracts and some fabrication jobs from refinery and petrochemical integrated development.

The company is positive on securing one or two bigger projects by later this year or early 2016.

However, we maintain our view that any contract win going forward will only be contract replenishment for MHB to sustain, but not boost revenue going forward.

Weak earnings with shrinking order book size has been investors’ main concern about the company. However, these concerns have been priced in given that the share price has fallen by 65% in one year.

The company also has a strong balance sheet with net cash of RM600 million or 38 sen per share. 

In view of limited downside and following the recent 15% price retracement since our initial “sell” call, we upgraded the stock from “sell” to “hold” after we changed our valuation method from price-earnings ratio basis to price-to-book value (P/BV) ratio based on 0.8 times P/BV. — Hong Leong Investment Bank Research, June 8

This article first appeared in The Edge Financial Daily, on June 9, 2015.