Highlights

Technip and MMHE joint venture have received confirmation from Petronas Carigali for a substantial engineering, procurement, construction, installation and commissioning (EPCIC) contract for the development of two gas fields in Block SK316. For Technip portion, a substantial offshore contract ranges from €250m to €500m. The Technip and MMHE JV had earlier participated in the front-end engineering design competition with subsequent rollover to EPCIC execution.

The EPCIC contract includes a central processing platform and a bridge-linked wellhead platform, which will be constructed at MMHE’s fabrication yard at Pasir Gudang in Johor, Malaysia, as well as a 75-kilometer pipeline, which will be installed by one of Technip’s pipelaying vessels.

Comments

This is in line with the contract award announcement by Petronas a week ago. We view the contract award positively as it is critical to replenish MHB’s shrinking orderbook which has decreased to RM1.8bn (circa 55% from TLP Malikai project) in June 13 from RM2.3bn in Mar 13. The other bidders for the job were Berlian MCDemott-THHeavy and Saipem-Sapurakencana. The project expects to start by 4Q13 and completed by 2H15. The SK316 comprise a central processing platform (CPP) and a bridge-linked wellhead platform. The CPP will be tied to a third wellhead structure at the NC8 field, about 8 km away.

While no contract values have been disclosed in the announcement, we estimated the contract to worth around U$1bn. We understand that MMHE’s portion consisting of procurement, fabrication and pre-commissioning, while Technip’s portion will be for front end engineering and design (FEED), project management and installation and commissioning. With the JV split to be 50:50, we estimated MHB portion could potentially worth up to US$500m or RM1.6bn. This will increased the current orderbook from RM1.8bn to RM3.4bn.

However, it will only be contract replenishment to sustain but not boost revenue going forward. In our assumptions, we have factored in RM2.5bn and RM3bn orderbook replenishment for FY14 and FY15 respectively.

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 with unchanged TP of RM3.77 based on an unchanged multiple of 20x on FY14 EPS of 18.8sen/share.

Source:Hong Leong Investment Bank Research- 8 Oct 2013