- We maintain our BUY call on Malaysia Marine & Heavy Engineering Holdings (MMHE) with a higher fair value of RM4.30/share (from an earlier RM4.10/share) based on a FY14F PE of 25x – at a 13% premium to Kencana Petroleum’s peak of 22x in 2007.

- We raise MMHE’s FY15F earnings by 13% with an increase of RM200mil of new order assumption to RM3.3bil on expectations of a rising momentum in new project rollouts by Petronas next year.

- As indicated in our earlier report, MMHE announced yesterday that it and Technip have received confirmation from Petronas Carigali to secure an engineering, procurement, construction, installation and commissioning (EPCIC) contract to develop 2 gas fields in a multi-platform development at Block SK 316 off Sarawak, Malaysia involving a central processing platform (CPP).

- The value of the contract has not been revealed but the announcement indicated that Technip’s portion of the contract could range between EUR250mil and EUR500mil. Our channel checks indicate that the joint-venture partners are still finalising some parts of the fabrication costs.

- The CPP and bridge-linked wellhead platform will be fabricated by MMHE while the offshore construction, hook up and commissioning as well as installation of a 75km pipeline undertaken by Technip. Hence, we understand that MMHE and Technip could equally share the entire EPCIC contract value.

- Recall that 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.

- Assuming Technip’s effective contract value is at the lower range of EUR250mil (RM1.1bil), MMHE’s portion could also amount to the same. This means that the group has secured RM2.3bil to date this year, raising MMHE’s order book by 56% to RM2.9bil – 1x of FY14F revenue and within our expectations.

- 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 decent FY14F PE of 23x – PP 12247/06/2013 (032380) 15% below SapuraCrest Petroleum’s 2007 peak of 27x. 

Source: AmeSecurities