Highlights

Despite recent strong share price performance, we remain our HOLD call (based on 20x F14P/E, inline with large cap peers) on the company given lack of near term catalyst and based on the premise that any contract win should only replenish its depleting orderbook.

Reuters reported Petronas will delay the commissioning of its RM60bn RAPID project from early 2017 to Jan 2018 as the project had been complicated by a need to secure water supplies as well as cater for proposed international partners. We understand MHB was keen on the RM6bn worth of onshore fabrication jobs (~10% of the RAPID investment value) under RAPID project. We believe the RAPID will eventually kick off as it allows our country to better capitalize on our O&G resources in long term. However, this news of delay might generate some negative sentiment in short term.

The company urgently needs to replenish its shrinking orderbook. Without any job win, the orderbook will fell to RM0.6bn by end of 2013 (<20% of FY14 revenue forecast) from RM2.3bn (~50% from TLP Malikai project) in Mar 13. We understand the company is currently tendering for RM3.8bn worth of jobs and expects to win RM1.5b of jobs by end of 2013. However, that will only be contract replenishment to sustain but not boost revenue going forward. In our assumptions, we have factor in RM2.5bn and RM3bn orderbook replenishment for FY14 and FY15 respectively.

We anticipate margin pressure in near term due to the competitive bid for Malikai and the Novated Kebabangan. In the longer term, MHB has entered into long-term agreements with key subcontractors and vendors to create strategic alliances in order to lower costs.

For exposure to fabrication work, we prefer SapuraKencana (BUY) with consistent track record to deliver. We also like Perisai (BUY) and Scomi Energy (HOLD due to recent strong share price rally) for drilling exposure. UMW O&G IPO (likely in Oct 13) might act as the re-rating catalyst.

Risks

• Problems sourcing O&G knowledge workers for growth.
• Execution risk and orderbook replenishment failure.

Forecasts

Unchanged.

Rating

HOLD

Positives –

• First bite of the cherry for local oil and gas projects.
• Room to grow yard capacity and capability.

Negatives –

• History of delivery delays and earnings disappointments,
• Difficult to source engineering and project talent.

Valuation

Maintain our HOLD rating on the stock with unchanged TP of RM3.95 based on an unchanged multiple of 20x and a FY14 EPS of 19.8sen/share.

Source: Hong Leong Investment Bank Research- 2 Aug 2013