MMHE’s JV with HSEL, a Singapore-listed company has been awarded a 5-year Master Service Agreement for Integrated Turnaround Main Mechanical & Maintenance Mechanical Static from Petronas. We are positive on the announcement as it showcases MMHE’s ability to win more contracts in the onshore plant maintenance space. Such a JV will enable MMHE to leverage on HSEL’s technical expertise in plant turnaround while HSEL can grow its Malaysian market. Despite keeping our estimates, we maintain our HOLD rating with higher TP of RM0.77 (0.5x FY19 PBV). We reckon that near term earnings weakness will be offset by improving long term prospect and firm balance sheet (net cash position of RM0.37/share).

NEWSBREAK

MMHE announced that its JV with Hiap Seng Engineering Limited (HSEL) has been awarded a Master Service Agreement for Integrated Turnaround Main Mechanical & Maintenance Mechanical Static from Petronas. The agreement is valid for a period of 5 years with the option to extend by Petronas. HSEL is a Singapore-listed company specialising in plant design, fabrication, construction and maintenance in oil & gas, petrochemical and pharmaceutical industries.

HLIB’s VIEW

Penetrating onshore plant maintenance space. We are positive on the announcement as it showcases MMHE’s ability to win more contracts in the onshore plant maintenance space. We understand that there are many other companies being awarded under the Master Service Agreement and each contractor is assigned to a particular zone. However, no contract value was disclosed as it is on a call-out basis, dependent on client’s requirement.

HSEL to perform plant turnaround work. HSEL specialises in plant maintenance and has business presence in Singapore, Thailand, Vietnam, UAE and etc. The split of equity stake between MMHE and HSEL was not disclosed. We gather that MMHE is responsible for the normal maintenance work while HSEL will perform the plant turnaround. Such a JV will enable MMHE to leverage on HSEL’s technical expertise while HSEL can grow its Malaysian market which only contributed c.3% of its total revenue in FY18. Should the JV be able to establish its track record, we do not discount the possibility of MMHE winning more of such contracts locally.

Forecast. No change to our earnings estimates as we reckon that the earnings contribution from this contract would not be too material.

Reiterate HOLD, higher TP: RM0.77. Despite maintaining our earnings estimates, we increase our TP to RM0.77 (from RM0.61) pegging to higher multiple of 0.5x FY19 PBV (from 0.4x previously). This is premised on its ability to expand its plant maintenance business which is generally recurring in nature, coupled with improving prospect following the stabilisation of oil prices above USD65/bbl level. This would provide further certainty for Petronas to roll out more jobs in the near term based on earmarked local upstream capex spending of RM15bn this year. All in, maintain HOLD rating as the abovementioned catalysts could be offset by unexciting financial performance in the next two quarters amidst strong balance sheet (net cash position of RM0.37/share)

Source: Hong Leong Investment Bank Research - 11 Apr 2019