- We maintain our SELL call on Malaysia Marine & Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM3.30/share based on a FY14F PE of 20x – at a 10% discount to Kencana Petroleum’s peak of 22x in 2007 but at parity to the larger oil & gas stocks with market capitalisation of over RM1bil.

- We maintain MMHE’s FY13F-FY15F earnings as expectations for the group’s new order intake and margins have not changed from our earlier assumptions.

- As indicated in our earlier reports, the group is still aiming to secure up to RM1.5bil of fresh orders, involving a large central procession platform and smaller structures from Petronas, by 4QFY13. But this means that with an estimated depletion rate of RM800mil per quarter, MMHE’s order book could slide by 39% from RM2.3bil as at end-1QFY13 (See Chart 4) to RM1.4bil by the end of the year- translating to only half of FY14F revenue.

- The new contracts secured could only begin contributions in 2HFY14, as MMHE’s accounting policy only recognised revenue when work progress has reached the completion stage of 25%.

- But that will leave a significant timing difference in 1HFY14, as there has been a dearth of order flows since the last engineering, procurement and construction job for the Malikai tension leg platform that was awarded in February this year.

- Additionally, there is no re-rating momentum to margin outlook currently due to the persistent competition from Korean yards. For the Malikai job, we understand that EBIT margin may only be in the high single digits, which is way below SapuraKencana’s fabrication margins of 15%.

- As the Gumusut-Kakap floating production storage semisubmersible has left the yard, the MMHE West yard is currently operating at 70% utilisation while MMHE East is at 50%. But the expected completion of the RM1.4bil Tapis platforms and conversion of the Cendor floating production storage offloading vessel by the end of this year will cause MMHE West’s yard utilisation to fall to 40% even if new jobs have been secured.

- For the East yard, the ONGC project should be completed by year-end, which leaves the yard mostly empty. With such a low overall yard utilisation, margins could be compressed even further in 1HFY14. Hence, earnings prospects for the group remain bumpy over the next 1-year horizon.

- The stock currently trades at a pricey FY14F PE of 26x – above the average of 20x for oil & gas stocks with market capitalisations of over RM1bil.

Source: AmeSecurities