• It is time to revisit MMHE as we believe prospects are improving from potential boost in offshore capex spending by key clients such as Petronas and Aramco.
• Meanwhile, MMHE is also in the midst of expanding dry dock capacity of its marine repair and conversion unit (MBU), DD3, which is slated for completion in 2Q20.
• Our estimates imply a 21% earnings CAGR over 2017-21F driven by the MBU capacity expansion and the HEU orderbook to be replenished by the Kasawari CPP and Aramco fabrication jobs.
• We initiate coverage on MMHE with a BUY call and RM0.83 SOP derived TP. We see upside potential outweighing downside risk at current levels; its net cash position amounts to RM0.42/share.

Beneficiary of uptick in offshore projects

Despite recent volatility in oil market, we expect oil companies to proceed with development projects after years of underinvestment following crude oil price collapse in 2014/15. Petronas plans to allocate RM14-15bn in 2019F for its upstream capex. Meanwhile, Aramco would have a massive capex spending, estimated at US$3bn pa, to support the In-Kingdom Total Value Add (IKVTA) initiative. MMHE together with partner TehnipFMC was recently shortlisted, as one of Aramco’s vendor under a 6+6 LTA.

Expanding recurring income business

MMHE is expanding its dry docking facility with construction of DD3, the third dry dock, due for completion in 2Q20. This would underpin structural earnings growth of its recurring income with more third party jobs can be secured. Currently, DD1 is reserved for MISC jobs with DD2 being the sole dry dock for third party jobs.

Solid fundamental and decent prospects

Based on our estimates, we expect MMHE’s earnings to turnaround in 2019F, implying 21% CAGR over 2017-21F. Our forecast factors in: i) Kasawari CPP development project, ii) Aramco fabrication job and iii) stronger MBU income with DD3 expansion. Despite facing tough operating condition in recent years, its balance sheet remains solid with zero gearing and cashpile worth RM593m as at 3Q18.

Initiate with BUY and TP of RM0.83

We initiate coverage on MMHE with a BUY call and RM0.83 SOP based TP. Its share price decline in recent years was warranted as major projects were deferred/shelved. With NOCs reviving upstream investments, we see upside catalysts outweighing downside risk at current price levels. Its cash balance amounts to RM0.42/share, implying 2019F adjusted ex-cash PB of 0.1x, a steep discount to its regional peers which trades at 0.8x.

Source: BIMB Securities Research - 27 Dec 2018