Malaysia Marine & Heavy Engineering - Small jobs prelude for more

-  We reiterate 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 has secured RM278mil contracts to fabricate three structures under the F14/F29 project for Sarawak Shell over a 1-year period. The first structure is the 2,024 tonne F14DR-A topside, which is a 9-slot unmanned satellite drilling riser platform. 

-  The second structure is the 1,731 tonne FY14/F29 process module while the third is the 6,400 tonne F14DR-A jacket. These structures will be installed at a gas field in water depths of 320 feet.

-  These structures would be fabricated at MMHE West Yard, which is currently undertaking the completion of the longdelayed Gumusut-Kakap floating production system.

-  We expect these projects, albeit relatively small, to be a prelude to a faster acceleration in the group’s new order book accretion. MMHE’s order book has currently fallen to RM2.4bil – which will last only 7 months of FY12F revenue.

-  Recently, Upstream reported MMHE will be awarded with fresh projects in Turkmenistan. This is for the engineering, procurement and construction contract of the 6,000-tonne Central Diyabekir wellhead platform in Turkmenistan.

-  Together with fresh new orders from the Thai-Malaysia Joint Development Area and East Malaysia together with the novation of Sime Darby’s RM1.2bil Kebabangan topside platform contract, we expect the group’s order book of RM2.4bil currently to rise to over RM4bil by the end of the year. Hence, we maintain FY12F-FY14F net profits.

-  We remain sanguine about MMHE’s re-rating prospects due to:  (1) Re-accelerating order book momentum in the industry, (2)Strategic position in the country’s sole deepwater fabrication space with the capability of more complex engineering work, 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: AmSecurities