Highlights

• Orderbook replenishment remains challenging with orderbook shrink from RM1.6bn in 4Q14 to RM1.2bn in 1Q15. Some big projects have been delayed by a year.

• With MISC’s vice president, Abu Fitri Abdul Jalil took over as new CEO in Mar 15, MHB has secured several offshore and marine maintenance contracts worth total of RM300m.

• Near term outlook for fabrication remains uncertain as the plunge in oil price has delayed capex spend and margin squeeze due to intense competition (especially from Korean shipyards). Utilisation rate for the yards has fallen from 75% to 50% given the lack of new bigger job order as existing old projects completed.

• MHB is bidding for more than RM7bn worth of contracts, majority from overseas (RM4.5bn) and remaining from local (RM2.6bn). Oversea market to focus is Middle East, Canada and Africa. Potential local contracts comprise of RM1.5bn Kasawari CPP contracts and some fabrication jobs from RAPID. The company is positive to secure 1 or 2 bigger projects by later this year or early 2016.

• However, we maintain our view that any contract win going forward will only be contract replenishment for MHB to sustain but not boost revenue going forward.

• Weak earning with shrinking orderbook size has been investor’s main concern about the company. However, these concerns have been priced in given share price has fallen by 65% in one year. The company also has strong balance sheet with net cash of RM600m or RM0.38 per share (circa 29% of share price).

Risks

• Execution risk,
• Orderbook replenishment failure,

Forecasts

• Unchanged.

Rating

HOLD ()

Positives

• Room to grow yard capacity and capability.

Negatives

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

Valuation

In view of limited downside and following recent 15% price retracement (since our initial sell call), we upgraded the stock from SELL to HOLD with TP adjusted from RM1.11 to RM1.33 after we changed our valuation method from P/E basis to P/B based on 0.8x BV.

Source: Hong Leong Investment Bank Research - 8 Jun 2015