Malaysia Marine & Heavy Engineering Holdings - Margin recovery, new orders on the way BUY

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

- MMHE’s 1QFY12 results came within street estimates with a net profit of RM78mil, accounting for 22% of FY12F consensus of RM357mil. While the results accounted for only 17% of our net profit of RM464mil and 20% of our pre-tax profit for FY12F (which assume a positive tax charge of 6% vs. negative charge of 10% in 1QFY12), we maintain our forecasts which incorporate an escalation in new order assumptions to RM4bil-RM5.5bil in FY12F-FY14F from RM3bil in CY11.

- MMHE’s 1QFY12 revenue slid 7% QoQ to RM665mil due to lower recognition from the RM1.5bil Tapis enhanced  oil recovery and RM236mil Telok Gas developments, but the EBIT margin rebound from 7% to 13% resulted in net profit surging 69% QoQ to RM81mil. 

- The expected margin rebound stemmed from profit recognition of the Tapis and Telok contracts, which was absent in the previous December 2011 quarter as the projects had not yet achieved the group’s policy threshold of 25% completion for commencement of profit recognition.

- The group’s order book declined by 23% QoQ to RM2.4bil (which has yet to include the novated RM1.2bil Kebabangan contract) due to the absence of fresh orders in 1QFY12. But with the Kinabalu topside and Lekas floating storage unit conversion projects expected to be completed in 2QFY12, we expect fresh new order awards soon from the group’s tenders, potentially worth RM4bil-RM5bil in the Thai-Malaysia Joint Development Area, Peninsular Malaysia, East Malaysia and Australia. 

- The ‘superlift’ integration of the Gumusut-Kakap floating production storage semi-submersible has been completed, while the mechanical and electrical assembly is being undertaken till the end of the year. But this frees yard space for the new order intake. Additional yard capacity will also come from the completion of the acquisition of Sime Darby’s 130-acre Pasir Gudang 2 in 2QFY12 and expansion of 40-acre adjoining Idemitsu land.

- We remain sanguine about MMHE’s re-rating prospects due to: (1) Re-accelerating order book momentum which could further raise the group’s current net order book of RM3bil.,(2)Novation of Sime Engineering’s RM1.2bil Kebabangan fabrication contract last month with the acquisition of Pasir Gudang Yard 2, and (3) Higher margin benchmarks for more complex structures.

- The stock still trades at an attractive FY12F PE of 18x, below 21-22x for SapuraCrest Petroleum and Kencana Petroleum.

Source: AmeSecurities