We downgrade MMHE to a HOLD following a 32% share price appreciation over the past 1 month. The stock was previously attractive as a trading opportunity given that its market cap had fallen below its net cash value. This scenario has since reversed although net cash still makes up 75% of its market cap. We believe the risk-reward is skewed to the downside as the prolonged low oil price environment would delay the replenishment of new contracts. Nevertheless, the current order book is likely to sustain it for the next 3–4 years. We make no change to our target price of RM0.45.

Slow New Contracts for Heavy Engineering

We see the risk of a slower roll-out of fabrication contracts. Petronas’ Activity Outlook had previously projected that the number of wellhead platform structures to be rolled out would increase from 5-9 units in 2019 to 10-13 units in 2020. However, a prolonged low oil price environment and potential capex cut by Petronas will potentially see postponement of new contract wins, leading to lower order book replenishment. Nevertheless, its current outstanding order book of RM3bn should allow it to be selfsustaining for the next 3-4 years.

Marine Segment Likely to Support Earnings

MMHE benefited from more dry docking activities in 2019 following an IMO2020 shipping regulation shift. Furthermore, two of Velesto’s rigs also underwent its 5-year SPS exercise at MMHE’s yard. We project a 7% decline in marine revenue in 2020 as global demand weakens, before a return to 13% growth in 2021E. The new dry dock 3, which will increase its current capacity by 68%, is targeted to be completed and commissioned by 3Q20, and would allow MMHE to cater to larger vessels.

Downgrade to Hold

We tweak our earnings slightly post the release of its 2019 annual report. Given its net cash position of RM493m as of end-2019, projected positive free cash flow and a RM3bn order book, we believe MMHE is able to be self-sustaining for the next few years, despite the likely slower roll-out of contracts. We maintain our 12-month target price of RM0.45, based on a 0.3x 2020E PBV, and downgrade MMHE to a Hold (from Buy) on valuation grounds. Upside risks include a better oil price outlook and quicker roll-out of contracts, while downside risks include execution hiccups and margin deterioration.

Source: Affin Hwang Research - 22 Apr 2020