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

- We maintain FY13F-FY15F earnings which assume new annual order intakes of RM2.5bil-RM4bil, as there is likely to be insignificant impact from the loss of the Bertam wellhead platform job to TH Heavy Engineering (THHE).

- THHE announced that it has received a letter of award from Lundin Malaysia B.V. to fabricate a wellhead platform for the PM307 Bertam Field Development Project - 175 kilometers off the east coast of Peninsular Malaysia. We are surprised that THHE managed to secure this project as

Upstream indicated earlier that MMHE was expected to secure this contract.

- The value of this one-off contract, which will be carried out over 12 months, was not disclosed. This is likely due to ongoing technical specifications. But our earlier channel checks indicate that the potential value of this contract could be around RM100mil- a slight 4% of MMHE’s estimated order book of RM2.5bil currently.

- For the rest of this year, we do not expect any further significant awards for MMHE. The visibility of the timeline for the award of contracts for larger CPP projects such as Sepat, Bokor and Dulang fields is unclear given that technical and financial evaluations are still ongoing given Petronas’ concern on cost escalations.

- But we remain sanguine that there will be ramped up interest in the sector given the impending award of the Pan-Malaysia umbrella transport and installation contracts by the end of this year as well as charters for drilling rigs and floating, production, storage and offloading vessels early next year. Although MMHE may not directly benefit from these contracts, this could catalyse fresh excitement for fabrication order flows.

- We have already highlighted in our past reports that the Malikai TLP contract, secured in February this year, and any additional orders secured by the end of 2013 could only begin profit contributions 2HFY14, as MMHE’s accounting policy recognises earnings when work progress has reached the completion stage of 25%. Hence, we believe that the market has already priced in the expected uneven earnings performance by MMHE over the next 2 quarters given the dearth of order flows since Feb this year.

- The stock currently trades at an attractive FY14F PE of 23x PP 12247/06/2013 (032380) – 15% below SapuraCrest Petroleum’s 2007 peak of 27x. 

Source: AmeSecurities