THHEAVY (7206) - TH Heavy Engineering - Heavy loss
Target RM0.28 (Stock Rating: REDUCE)
Expenses for lost contracts and a staff retrenchment exercise caused THHE to post an FY14 core net loss of RM64m, higher than our net loss expectation of RM22m and consensus’ RM16m net loss. The fabrication of FPSO modules started in 1Q15 but the fabrication outlook continues to be grim for certain players, including THHE. We continue to value the stock at a CY16 P/E of 10.5x, still at a 30% discount to the oil & gas big caps. We maintain our Reduce call, with the slower fabrication order book replenishment as a potential de-rating catalyst. Switch to Perdana, our top pick among the oil & gas small caps.
FY14 core net loss of RM64m
Even after excluding a RM12.3m impairment loss on receivables, THHE booked a wider core net loss of RM45m in 4Q14, bringing FY14 core net loss to RM64m. The company expensed the bidding and engineering costs in full for two large central processing platform (CPP) fabrication projects – Bergading and Baronia – each worth an estimated US$1bn that it was expected to secure but were instead awarded to a foreign competitor. The loss of these contracts led to a lower yard utilisation, forcing the company to downsize its workforce in 4Q14. The absence of a dividend payment was expected.
Early FPSO work starts in 1Q15
We understand that management has slashed its fixed cost by around 50% since Dec 2014, but THHE is still likely to end 1Q15 with a loss before turning the corner in 2Q15. A lower cost structure and fabrication of FPSO modules that started in 1Q15 are expected to help THHE return to the black in 2Q15. To recap, the company in May 2014 secured an 8-year, US$372m FPSO contract from Nippon Oil for the Layang field. The FPSO vessel operations are expected to begin in mid-FY16.
Grim fabrication outlook
THHE completed the Bertam and Permas projects in FY14, leaving the company with only one sizeable fabrication contract, which is the RM250m Kinabalu topside project that is slated for completion in Aug 2015. The outlook is far from exciting as a contract for Sepat CPP, estimated to be worth US$1.6bn, has been deferred to 2017 at the earliest. MMHE, which also has its hopes on Sepat, is facing the same dire predicament.
Source: CIMB Daybreak - 02 March 2015
Target RM0.28 (Stock Rating: REDUCE)
Expenses for lost contracts and a staff retrenchment exercise caused THHE to post an FY14 core net loss of RM64m, higher than our net loss expectation of RM22m and consensus’ RM16m net loss. The fabrication of FPSO modules started in 1Q15 but the fabrication outlook continues to be grim for certain players, including THHE. We continue to value the stock at a CY16 P/E of 10.5x, still at a 30% discount to the oil & gas big caps. We maintain our Reduce call, with the slower fabrication order book replenishment as a potential de-rating catalyst. Switch to Perdana, our top pick among the oil & gas small caps.
FY14 core net loss of RM64m
Even after excluding a RM12.3m impairment loss on receivables, THHE booked a wider core net loss of RM45m in 4Q14, bringing FY14 core net loss to RM64m. The company expensed the bidding and engineering costs in full for two large central processing platform (CPP) fabrication projects – Bergading and Baronia – each worth an estimated US$1bn that it was expected to secure but were instead awarded to a foreign competitor. The loss of these contracts led to a lower yard utilisation, forcing the company to downsize its workforce in 4Q14. The absence of a dividend payment was expected.
Early FPSO work starts in 1Q15
We understand that management has slashed its fixed cost by around 50% since Dec 2014, but THHE is still likely to end 1Q15 with a loss before turning the corner in 2Q15. A lower cost structure and fabrication of FPSO modules that started in 1Q15 are expected to help THHE return to the black in 2Q15. To recap, the company in May 2014 secured an 8-year, US$372m FPSO contract from Nippon Oil for the Layang field. The FPSO vessel operations are expected to begin in mid-FY16.
Grim fabrication outlook
THHE completed the Bertam and Permas projects in FY14, leaving the company with only one sizeable fabrication contract, which is the RM250m Kinabalu topside project that is slated for completion in Aug 2015. The outlook is far from exciting as a contract for Sepat CPP, estimated to be worth US$1.6bn, has been deferred to 2017 at the earliest. MMHE, which also has its hopes on Sepat, is facing the same dire predicament.
Source: CIMB Daybreak - 02 March 2015
