Malaysia Marine and Heavy Engineering Holdings Bhd
Sept 3 (97.5 sen)
Upgrade to market perform with a target price (TP) of RM1: We came away from Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) West Yard in Pasir Gudang, Johor, on Wednesday feeling largely “neutral” as its SK316 project sailed away, marking the completion of a major project. 

Its largest project in hand, tension leg platform (TLP) Malikai deepwater, is close to completion at 84%, while more jobs (Kanowit hook-up and commissioning, Baronia central processing platform-B), albeit smaller in size, are set to commence soon in the 

yard. 

More fabrication job wins are still needed if it were to achieve our financial year 2015 estimate (FY15E)  target contract replenishment of RM600 million for its fabrication division, reflecting slow fabrication awards regionally and globally. 

Our forecast is deemed conservative, given that we have imputed relatively low earnings recognition from our assumed new wins for FY15. 

MHB’s yard optimisation programme is promising with RM7 million to RM8 million savings per annum in crane leasing costs expected once the two Goliath cranes are up and running. 

While fabrication job awards slow, its marine division is doing well with several major jobs on hand mainly involving vessels, conversions, dry-docking and life extensions. 

However, the profitability of the TLP Malikai project remains uncertain due to its complexity and unexpected variation orders, which have hiked costs. That aside, its other projects remain on track with Besar A-WHP at 60% completion and the North Malay Basin Bergading project at 26%.

With the slowdown in the oil and gas (O&G) industry, fabrication project awards have been slow this year, with mega projects (that is the Kasawari project) being put on hold with no definite timeline for new contract awards. 

To date, the group has secured about RM600 million worth of projects inclusive of marine projects (vessel dry-docking, refurbishment and maintenance works). 

Assuming a 50% share of fabrication jobs, which amount to about RM300 million, it still has some work to do before it could achieve our target replenishment rate of RM600 million for FY15. 

While the upstream outlook remains bleak for the moment, we believe more downstream fabrication jobs like in Pengerang will fill in the gap as the projects which have secured a final investment decision from Petroliam Nasional Bhd proceed in the near term. To note, the group has one foot in with the RM10 million Rapid Package 5 secured recently, and it looks to add more Rapid jobs in the coming years.

One of the main highlights of the group’s yard optimisation programme is the two 600-tonne Goliath cranes which could cater for higher specification and demanding fabrication jobs like the TLP Malikai project.

The first crane is expected to be up by December, while the second by March 2016. 

Moreover, it has also consolidated its piping operations at one location with the brand-new Centralised Piping Workshop, which results in better project flow execution and control.

In contrast to its slowing fabrication business, the group’s marine division is expected to be busy in the medium term, with a slew of jobs flowing in. 

Naga 2, a jack-up rig from UMW Oil & Gas Corp Bhd has just departed from the yard’s dock. Currently, it is busy with several projects, namely the refurbishment of floating storage and offloading (FSO) Cendor, life extension for MISC Bhd’s liquefied natural gas (LNG) vessel Puteri Intan, refurbishment of FSO Nautica Bergading and so on. 

This division is expected to remain strong in the medium term, with more aged local LNG vessels expected to come into the yard for more life extension projects in the next few years.

We have upgraded the stock to “market perform” from “underperform” previously due to its better risk-reward ratio post share price weakness recently. 

However, we believe headwinds still persist for the company, with no major catalysts in sight in the near term. 

The TP is maintained at RM1 pegged to 12 times calendar year 2016 per earnings ratio, which is slightly higher than large-cap O&G’s target price-earnings ratio of 10 to 11 times under an average oil price scenario of US$40 (RM169.16) per barrel, due to its strong net cash balance sheet position and growing marine division, which has attracted international clients. — Kenanga Investment Bank Bhd, Sept 3

This article first appeared in digitaledge Daily, on September 4, 2015.