Malaysia Marine & Heavy Engineering - No kicker from Malikai job already in the bag HOLD

- We maintain our HOLD recommendation on Malaysia Marine & Heavy Engineering Holdings (MMHE), with an unchanged fair value of RM4.60/share based on an FY13F PE of 20x – 10% below Kencana Petroleum’s peak of 22x in 2007.

- We expect MMHE to announce soon that it has secured the engineering, procurement and construction (EPC) contract for the Malikai tension leg platform (TLP) following the recent announcement by the consortium Shell, ConocoPhillips and Petronas that the final investment decision has been made for the deepwater field development. Recall that UMW’s wholly-owned UMW Petrodil (Malaysia) Sdn Bhd has been recently awarded a contract to supply a single combo top tension riser for the Sabah Shell Petroleum Company Ltd's Malikai project worth US$140mil (RM432mil). 

- We understand that the letter of award for the Malikai EPC has already been awarded to MMHE-Technip joint venture but the contract value, potentially over RM1bil, is still being negotiated due to evaluations on the scope of works. In our view, we do not expect this development to catalyse a re-rating for MMHE as this contract, following a re-tender exercise, has been long expected since last year. 

- Recall that Malikai development involves 17 wells drilled from the 23,500 tonne TLP, designed to process 60,000 barrels per day of liquids as well as compress 50 million cubic feet per day (mmscfd) of gas and export 40 mmscfd of gas. It will also treat 80,000 barrels per day of seawater for reinjection. The TLP, scheduled to be installed at the field in 3Q2015 by Dutch Heerema Marine Contractors, will be equipped with 34 well slots and tied to an integrated drilling and production platform at the Kebabangan northern hub development off Sabah.

- The group hopes to expand its depleting order book of RM2.3bil with tenders worth up to RM5bil, which includes overseas jobs in which the chances of success are uncertain. But the stock trades at an unexciting FY13F PE of 18x, on parity with oil & gas stocks with market capitalisation of over RM1bil. For exposure to this sector, we prefer SapuraKencana Petroleum, which has an order book of over RM10bil and a consistent earnings delivery record. Additionally, SapuraKencana is poised to secure the RM1bil fabrication contract for the Semarang central processing platform and on target for the installation and commissioning job for the Malikai risers and pipelines.

Source: AmeSecurities