Malaysian Marine & Heavy Eng - Completed Sime yard acquisition BUY

- We reiterate our BUY on Malaysia Marine & Heavy Engineering Holdings (MMHE), with an unchanged fair value of RM6.50/share, based on an FY12F PE of 22x – at parity to Kencana Petroleum’s peak in 2007.

- MMHE announced the completion of its acquisition of Sime Darby’s 130-acre fabrication yard in Pasir Gudang on 31 March this year for a final price of RM393mil, just slightly lower than the earlier indicative price of RM399mil back in May 2011. 

- As expected and indicated in our earlier reports, the group also announced that it has novated the RM1.2bil Kebabangan topside fabrication contract for the Kebabangan Petroleum Operating Company (KPOC) from Sime Darby. Recall that this project is scheduled for completion in September 2013.

- We understand that the details such as contractual terms and conditions of the Kebabangan contract are still being negotiated with KPOC. But the project is expected to generate a comfortable profit margin, which should mean that the novation should be earnings accretive.

- Assuming a pre-tax margin of 8% for the Kebabangan job and loss of interest income from the cash acquisition of the yard, we estimate that this acquisition and novation should contribute RM16mil or 3% to FY12F net profit.

- The novation of the Kebabangan contract will raise MMHE’s order book by 30% from RM3.1bil to RM4bil. While MMHE’s current yard is currently almost fully utilised, its order book expansion is still poised to accelerate with the 35% expansion of yard capacity from the Sime yard acquisition, coupled with the upcoming completion of the Kinabalu gas processing platform and recent ‘superlift’ milestone of the Gumusut-Kakap floating production storage (PFS) semi-submersible. 

- Additionally, we expect strong newsflow from Petronas/ Turkmenistan Phase 2 development following the recent re-election of Turkmenistan’s incumbent president.  We understand that the group is currently bidding for fresh projects worth RM5bil, of which at least half stems from Petronas.

- Hence, we expect the Sime yard acquisition to catalyse the re-rating in MMHE. Other catalysts are the expected upsurge in new order momentum and margin improvement with the Gumusut-Kakap FPS project reaching the 25% completion threshold amid the operational revamp under the new group managing director. The stock currently trades at an attractive FY12F PE of 19x, below Kencana Petroleum’s peak of 22x.  

Source: AmeSecurities