- We upgrade our call on Malaysia Marine & Heavy Engineering Holdings (MMHE) from SELL to HOLD with a higher fair value of RM4.10/share (from RM3.30/share previously) based on a FY14F PE of 24x – at a 10% premium to Kencana Petroleum’s peak of 22x in 2007.

- We raise MMHE’s FY14F-FY15F earnings by 4%-6% with a 0.5%-point increase in our EBIT fabrication margin to 8.5% while maintaining our new order assumption of RM2.5bilRM3bil.

- As guided in our past reports, Petronas announced that the joint venture of Technip and Malaysia Marine Heavy Engineering (MMHE) has been confirmed as the winner of a coveted engineering, procurement, construction, installation and commissioning contract to develop 2 gas fields in a multi-platform development at Block SK 316 off Sarawak, Malaysia involving a central processing platform.

- The pair beat rivals US-based McDermott-TH Heavy Engineering and Italy’s Saipem. Upstream indicated that the local content contribution may have swayed Petronas’ final award decision in Technip-MMHE’s favour as the pair did not submit the lowest bid price.

- Petronas did not indicate the contract value, but we understand that it could reach US$1bil while MMHE’s portion could be around RM1bil. This means that the group has secured RM2.2bil to date this year, raising MMHE’s order book by 56% to RM2.8bil – 0.9x FY14F revenue.

- Additionally, Petronas is targeting a phased development of the NC3 and NC8 discoveries to deliver 600 million cubic feet per day to the ninth liquefied natural gas train at its Bintulu LNG complex. It is scheduled for completion by 2015. Petronas is also drawing up another development plan for the Kasawari field, also in Block SK316,which is intended to feed the new train at Bintulu.

- We believe that the market has already priced in the expected uneven earnings performance by MMHE over the next 2-3 quarters given the dearth of order flows since February this year.

- Note that any additional orders secured by the end of this year could only begin profit contributions in 2HFY14, as MMHE’s accounting policy only recognises earnings when work progress has reached the completion stage of 25%.

- The stock currently trades at a fair FY14F PE of 22x – 10% above the average of 20x for oil & gas stocks with market PP 12247/06/2013 (032380) capitalisations of over RM1bil.

Source: AmeSecurities