• Despite volatility in crude oil price, we remain optimistic in MMHE’s turnaround story with Kasawari project providing revenue visibility until 2023. Additionally, the company’s tenderbook has risen to RM13bn amidst rising approved offshore projects.
• Management expects its third dry-dock (DD3) to be completed by 3Q20. We expect this to provide structural earnings growth moving forward as it will allow MMHE to accept more marine repairs jobs from third-party clients.
• We retain our FY19-21F earnings forecast at this juncture, but risk is on the upside on the probability of MMHE securing higher contract win this year.
• We upgrade MMHE to BUY (from HOLD) with higher SOP-derived TP of RM0.90 (from RM0.82). We think recent price weakness is a good buying opportunity amidst upcycle in upstream projects which MMHE is a potential beneficiary.

Kasawari project to proceed regardless

Benchmark Brent oil price sank below US$60/bbl to a 1-year low level as the Coronavirus outbreak bring fears over slump in China’s oil demand. Notwithstanding, we remain sanguine with MMHE’s turnaround story underpinned by its orderbook worth RM2.7bn (mainly from Kasawari project) which provides revenue visibility until 2023. Despite volatility in oil market, we expect Petronas to proceed with its capex project which is based on oil price of US$55-60/bbl.

Busier year for offshore contractors

We expect a busier year ahead for MMHE as its tenderbook rose to RM13bn amidst rising offshore projects. According to Rystad Energy, total approved offshore projects rose by 50% yoy to US$92bn in 2019 (Chart 1) driven by projects sanctioned in Saudi and Brazil.

Expanding recurring income business

As at 3Q19, the construction of DD3 reached 70% completion and it is on-track for commercial operation by 3Q20. We expect this to provide structural earnings growth of its recurring income with more third-party jobs to be secured. Currently, DD1 is reserved for MISC jobs with DD2 being the sole dry dock for third party jobs.

Keep earnings forecast unchanged

We maintain our FY19-21F earnings forecast, but upside potential to earnings is probable on higher contract wins. We expect MMHE’s financial to turn to black in FY20 underpinned by (i) profit recognition from Bokor project; (ii) secure order from Aramco/ windfarm projects and (iii) earnings growth from DD3. To recap, we have assumed an annual orderbook replenishment of RM1bn.

Source: BIMB Securities Research - 6 Feb 2020