MMHE has secured a contract from SapuraOMV to undertake EPCIC services for the SK408W Jerun project. Our channel checks suggests that the project is estimated to be worth c.RM1-1.5bn with a duration of 3 years. The contract win would bring its current orderbook to c.RM3bn, representing an orderbook cover of about 2x. We view this contract win as a mixed bag as we believe that there could be execution risks based on MMHE’s track record. However, we believe that the increase in contract awards of late is a leading indicator towards the recovery in the O&G sector. Hence, we maintain our HOLD call at a higher TP of RM0.62 (from RM0.43) based on 0.5x (from 0.35x) FY21 BVPS.

NEWSBREAK

MMHE has secured a contract from SapuraOMV to undertake EPCIC services for the SK408W Jerun development project, offshore Sarawak. This EPCIC contract comprises the construction of an approximately 15,000MT topside, 10,000MT jacket and 5,000MT piles of Central Processing Platform (CPP). Upon completion, the facilities will be installed in the Jerun gas field, which lies in the SK408W Block located offshore Bintulu, Sarawak. SapuraOMV Upstream (Sarawak) is the Operator of SK408W Block, with Sarawak Shell and PETRONAS Carigali holding 30% equity interest, each.

HLIB’s VIEW

Victor of the Jerun project. Our channel chacks suggest that the Jerun CPP project is estimated to be worth c.RM1-1.5bn with a duration of about 3 years. We believe that the award of the Jerun CPP project to MMHE can be attributed to Sapura’s inability to undertake the project internally as its yard is almost fully utilised for existing projects. While contract wins should be inherently positive to MMHE, we view this as a mixed bag as past large scale projects have encountered hiccups. The securement of the Jerun CPP project would bring MMHE’s orderbook backlog to c.RM3bn, representing an orderbook cover of about 2x.

Outlook. Despite its robust orderbook, we believe that it is crucial for MMHE to improve on its operational efficiency to become profitable, a feat that it has not achieved from FY18-FY20. Nevertheless, we believe that the recent trend of contract awards in the Malaysian O&G space is a leading indicator towards a recovery in the O&G sector.

Forecast. We upgrade our FY22 forecast by 10% to factor in the Jerun contract win while leaving our FY21 earnings assumption unchanged. We chose to be conservative on our earnings assumptions for the Jerun project due to its poor track record in the execution and delivery of its previous large scale projects.

Maintain HOLD, TP: RM0.62. We maintain our HOLD call at a higher TP of RM0.62 based on 0.5x (from 0.35x) FY21 BVPS, which is -0.5SD below its 5 year historical mean P/B. While we believe that the O&G industry in Malaysia is recovering, we would need to see an improvement in operational efficiency from MMHE in order for us to warrant a buy call on the stock.

Source: Hong Leong Investment Bank Research - 14 Apr 2021