THHEAVY (7206) : TH Heavy Engineering - Lighter fabrication order book
Target RM0.43 (Stock Rating: ADD)
Expenses for lost contracts caused THHE to post a wider net loss of RM20m in 9M14, significantly below our FY14 expectation and consensus estimate. The fabrication of FPSO modules will start in FY15 and the Sepat CPP contract is still on offer but the fabrication outlook appears grim for certain players, including THHE. We continue to value the stock at 14.8x CY16 P/E, still at a 30% discount to the P/E of the oil & gas big caps. However, our target price drops as we slash FY14-16 EPS for our lower yard utilisation assumptions. We downgrade the stock from Add to Reduce, with the slower fabrication order book momentum as a potential de-rating catalyst. Perdana is our new top pick for oil & gas small caps.
Net loss widens in 3Q
We are disappointed that THHE booked a wider net loss of RM15m in 3Q14, bringing 9M14 net loss to RM20m. We understand that the company expensed the bidding and engineering costs for two large central processing platform (CPP) fabrication projects worth an estimated US$1bn each- namely Bergading and Baronia- that it expected to secure but were awarded to a foreign company instead. Excluding these costs, we estimate that the company would have at least achieved breakeven at net profit level in 3Q14.
RM1.48bn order book
As at 30 Sep, THHE had a fabrication order book of RM180m and an 8-year floating production, storage and offloading (FPSO) contract worth US$372m (RM1.3bn). While we are positive on the FPSO contract, we have turned cautious on the outlook for certain local fabricators, including THHE and MMHE, as their foreign counterparts appear to have pricing advantage (please refer to our separate note on MMHE). A contract for Sepat CPP, estimated to be worth US$1.6bn, is still up for grabs and THHE has expressed interest in the contract. However, we have not factored it into our forecasts.
Downgrade from Add to Reduce
We overestimated THHE’s fabrication order book replenishment. Contributions from the fabrication of FPSO modules will start to flow in FY15 but the company’s fabrication prospects are deteriorating. Given the challenging fabrication operating environment (see overleaf), we slash our FY15-16 yard utilisation assumptions from 60-65% to 20% and downgrade the stock from Add to Reduce. Our new top pick for oil & gas small caps is Perdana.
Source: CIMB Daybreak - 01 December 2014
Target RM0.43 (Stock Rating: ADD)
Expenses for lost contracts caused THHE to post a wider net loss of RM20m in 9M14, significantly below our FY14 expectation and consensus estimate. The fabrication of FPSO modules will start in FY15 and the Sepat CPP contract is still on offer but the fabrication outlook appears grim for certain players, including THHE. We continue to value the stock at 14.8x CY16 P/E, still at a 30% discount to the P/E of the oil & gas big caps. However, our target price drops as we slash FY14-16 EPS for our lower yard utilisation assumptions. We downgrade the stock from Add to Reduce, with the slower fabrication order book momentum as a potential de-rating catalyst. Perdana is our new top pick for oil & gas small caps.
Net loss widens in 3Q
We are disappointed that THHE booked a wider net loss of RM15m in 3Q14, bringing 9M14 net loss to RM20m. We understand that the company expensed the bidding and engineering costs for two large central processing platform (CPP) fabrication projects worth an estimated US$1bn each- namely Bergading and Baronia- that it expected to secure but were awarded to a foreign company instead. Excluding these costs, we estimate that the company would have at least achieved breakeven at net profit level in 3Q14.
RM1.48bn order book
As at 30 Sep, THHE had a fabrication order book of RM180m and an 8-year floating production, storage and offloading (FPSO) contract worth US$372m (RM1.3bn). While we are positive on the FPSO contract, we have turned cautious on the outlook for certain local fabricators, including THHE and MMHE, as their foreign counterparts appear to have pricing advantage (please refer to our separate note on MMHE). A contract for Sepat CPP, estimated to be worth US$1.6bn, is still up for grabs and THHE has expressed interest in the contract. However, we have not factored it into our forecasts.
Downgrade from Add to Reduce
We overestimated THHE’s fabrication order book replenishment. Contributions from the fabrication of FPSO modules will start to flow in FY15 but the company’s fabrication prospects are deteriorating. Given the challenging fabrication operating environment (see overleaf), we slash our FY15-16 yard utilisation assumptions from 60-65% to 20% and downgrade the stock from Add to Reduce. Our new top pick for oil & gas small caps is Perdana.
Source: CIMB Daybreak - 01 December 2014
