MMHE announced that it has secured the Kasawari EPCIC contract after a long delay. Based on our estimates, we believe this contract could be worth RM5–6bn, and is to be executed together with Technip (its partner). This could potentially raise MMHE’s current order book size by 3x, which is a long-term re-rating catalyst for the stock. With this sizeable win, we upgrade MMHE to a Hold (from Sell) with a higher TP of RM0.83.

Kasawari Contract Details

The work scope involves the engineering, procurement, construction, installation and commissioning (EPCIC) of a 47,000-tonne central processing platform (CPP) and 8,600-tonne wellhead platform (WHP) with a flare structure and two bridges. The contract sum and period were not disclosed. Recall that this CPP has faced countless delays due to the high cost structure and CO2 content located at the field, making it a highly complex development.

No Contract Sum; Taking Bokor and Pegaga Project as Reference

The Bokor CPP awarded to MMHE back in April 2017 has a weight of 18,800 tonnes and is valued at RM1bn, while the 3 WHPs awarded to Brooke Dockyard were approximately 3,000 tonnes valued at RM290m. This placed Bokor at RM1.3bn with 21,800 tonnes. Meanwhile, Sapura Energy’s Pegaga project, valued at RM2.1bn, has a total size of 19,500 tonnes. By our estimates, Kasawari contract size could be c. RM5–6bn. Assume 50% to be executed by MMHE, this would increase its current outstanding order book by 3x from RM864m (as of March 2019).

Raised FY20-21E Earnings, But Cut FY19 to a Loss

Kasawari contribution in FY20 may not be as material, as bulk of the profit are likely still back-loaded towards the tail-end of the contract, based on MMHE’s adoption of a more conservative accounting policy for its EPCIC contracts. Looking at the recent awarded Bokor CPP, the group reported an average loss of RM13m over 5 of the past 7 quarters for its heavy engineering. Nevertheless, we raised FY20-21E earnings by 51-56% following this sizeable contract win, but cut FY19 to a loss as we foresee a continuing loss for its marine business unit.

Source: Affin Hwang Research - 24 Jul 2019