MHB (5186) : Malaysia Marine & Heavy Eng - The going gets tougher
Target RM1.70 (Stock Rating: REDUCE)
In addition to project delays, we are concerned that MMHE’s dry spell in terms of order book replenishment may be extended. The company’s order book fell to a record low of RM1.7bn at 30 Sep 2014 and the prospects appear grim, if the recent awards of large fabrication contracts to foreign companies are any indication. Our target price falls as we cut FY15-16 EPS for lower contract win assumptions. We continue to value the stock at 21.2x CY16 P/E, still at a 30% premium over our target market P/E of 16.3x although we are reviewing our premium valuation. We maintain our Reduce call, with the potential de-rating catalysts of slower order book momentum and longer project delays. Switch to SapuraKencana.
What Happened
Taking our cue from THHE’s 3Q14 results (please refer to our separate note on THHE) and the recent developments in the domestic fabrication segment where large fabrication contracts were awarded to foreign companies, we maintain our Reduce rating on MMHE, as its earnings outlook appears grim. We believe the local fabricators missed out on the main packages of the large fabrication contracts for the Bergading and Baronia central processing platforms (CPP), each worth an estimated US$1bn.
What We Think
In our view, the going will get tougher for certain fabricators, including MMHE. Order book replenishment has been a challenge for the company and its prospects are not improving. THHE is facing the same issue but the company has ventured into the FPSO segment and secured an 8-year US$372m contract from Nippon Oil in May 2014. This is in contrast to MMHE, whose bread-and-butter business is fabrication. MMHE’s order book declined to a record low of RM1.7bn at 30 Sep 2014 (Figure 1). Earlier in the year, management expected to secure RM1.5bn worth of new projects in FY14. However, MMHE has only won two projects worth RM250m YTD. Furthermore, the profit contributions from the company’s two sizeable projects- Malikai and SK316 - have been delayed to 2H15. As at 30 Sep 2014, Malikai was 41% completed and SK316 was 29% completed.
What You Should Do
Stay away from MMHE. We expect a quiet 1H15 as the profits from Malikai and SK316 are only expected to start flowing in 2H15. A contract for Sepat CPP, estimated to be worth US$1.6bn, is still up for grabs. However, we have not factored it into our forecasts.
Source: CIMB Daybreak - 01 December 2014
Target RM1.70 (Stock Rating: REDUCE)
In addition to project delays, we are concerned that MMHE’s dry spell in terms of order book replenishment may be extended. The company’s order book fell to a record low of RM1.7bn at 30 Sep 2014 and the prospects appear grim, if the recent awards of large fabrication contracts to foreign companies are any indication. Our target price falls as we cut FY15-16 EPS for lower contract win assumptions. We continue to value the stock at 21.2x CY16 P/E, still at a 30% premium over our target market P/E of 16.3x although we are reviewing our premium valuation. We maintain our Reduce call, with the potential de-rating catalysts of slower order book momentum and longer project delays. Switch to SapuraKencana.
What Happened
Taking our cue from THHE’s 3Q14 results (please refer to our separate note on THHE) and the recent developments in the domestic fabrication segment where large fabrication contracts were awarded to foreign companies, we maintain our Reduce rating on MMHE, as its earnings outlook appears grim. We believe the local fabricators missed out on the main packages of the large fabrication contracts for the Bergading and Baronia central processing platforms (CPP), each worth an estimated US$1bn.
What We Think
In our view, the going will get tougher for certain fabricators, including MMHE. Order book replenishment has been a challenge for the company and its prospects are not improving. THHE is facing the same issue but the company has ventured into the FPSO segment and secured an 8-year US$372m contract from Nippon Oil in May 2014. This is in contrast to MMHE, whose bread-and-butter business is fabrication. MMHE’s order book declined to a record low of RM1.7bn at 30 Sep 2014 (Figure 1). Earlier in the year, management expected to secure RM1.5bn worth of new projects in FY14. However, MMHE has only won two projects worth RM250m YTD. Furthermore, the profit contributions from the company’s two sizeable projects- Malikai and SK316 - have been delayed to 2H15. As at 30 Sep 2014, Malikai was 41% completed and SK316 was 29% completed.
What You Should Do
Stay away from MMHE. We expect a quiet 1H15 as the profits from Malikai and SK316 are only expected to start flowing in 2H15. A contract for Sepat CPP, estimated to be worth US$1.6bn, is still up for grabs. However, we have not factored it into our forecasts.
Source: CIMB Daybreak - 01 December 2014
