Highlight

Share price recently has rebounded 14% from low of RM3.50 attributed to more fabrication contracts to be awarded in June/July 14. We estimate more than RM10bn worth of potential contract will be awarded to the sector this year.

Upstream reported that MMHE may potentially win estimated RM500m worth of fabrication contract for the Bergading jacket. The award is expected to be announced in May 14. The jacket size is around 8,000 tonnes while the topside at 20,000 tonnes. The Bergading structure is equipped to handle 450m cubic feet gas per day (MMcfd) of which 430MMcfd will be exported to an onshore gas terminal in Terengganu.

In addition, MMHE and Technip consortium is also bidding for Baram Delta Gas Gathering phase two (Bardegg-2) projects on Baronia field. The Central Processing Platform CPP includes 13,000 tonnes of topsides and 6,800 tonnes of jacket. We estimate the CPP contract is worth over RM1bn.

Overall, the company is tendering RM4-5bn worth of contract. With yard utilisation around at 60%, MHB should benefit from the increasing fabrication job going forward.

Comment

Despite the expectation of strong contract newflows for fabrication in 2H14, we believe it will only be contract replenishment for MHB to sustain but not boost revenue going forward. We have already factored in RM2.5bn and RM3bn orderbook replenishment for FY14 and FY15, respectively.

To recap, operating margin has fallen from 9% in 3Q13 to 6.5% in 4Q13 due to higher cost expected for Tapis EOR and yet to recognised profit from TLP Malikai project. Going forward, we expect operating margin to rebound from 6.8% in FY13 to 11% in FY15 due to contribution from Malikai and SK316 projects and continue cost cutting measure. However, this is only going to make its valuations on par with big caps peers but not sufficient to turn positive on share price performance.

Current orderbook stood at RM2.5bn with 86% from TLP Malikai and SK316 projects. The company expects to recognise profit from Malikai in 2Q14 and SK316 in 2H14.

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 an unchanged TP of RM3.87 based on an unchanged multiple of 20x on FY15 EPS of 19.3sen/share.

Source: Hong Leong Investment Bank Research - 29 Apr 2014