We came away from MHB’s West Yard in Pasir Gudang yesterday feeling largely neutral as its SK316 project sailed away recently. Its largest project in hand, TLP Malikai, is close to completion at 84% while more jobs (Kanowit HUC, Baronia CPP-B), albeit smaller in size, are set to commence soon in the yard. More fabrication job wins are still needed if it were to achieve our FY15E target contract replenishment of RM600m for fabrication division, reflecting slow fabrication awards regionally and globally. Notwithstanding, our forecast is deemed conservative given that we have imputed relatively low earnings recognition from our assumed new wins for FY15. Its Yard Optimisation Programme is promising with RM7-8m savings per annum in crane leasing costs expected once the two Goliath cranes are up and running. While fabrication job award slows, its Marine division is doing well with several major jobs on hand mainly involving vessel, conversions, dry docking and life extensions. Upgrade to MARKET PERFORM due to better risk-reward profile with TP maintained at RM1.00 pegged to 12x FY15 PER.

Quick update on current jobs. Yesterday, we visited MHB’s fabrication yard in Pasir Gudang to have a firsthand look at its current projects and get more updates on its future plans and strategies. It’s SK316 Central Processing Platform (CPP) and Wellhead platform (WHP) project has just sailed away in early this month, marking the completion of a major project. Meanwhile, its biggest project in hand, Tension Leg Platform (TLP) Malikai Deepwater Water, is progressing well at 84% project completion recorded based on latest update. However, profitability on this project remains uncertain due to its complexity and unexpected variation orders, which has hiked costs. That aside, its other projects remain on track with Besar A-WHP at 60% completion and North Malay Basin Bergading project at 26%.

Fabrication projects lull. With the slowdown in O&G industry, fabrication project awards have been slow this year with mega projects (i.e. Kasawari project) being put on hold with no definite timeline for new contract awards. To date, the group has secured c.RM600m worth of projects inclusive of Marine projects (vessel dry docking, refurbishment and maintenance works). Assuming 50% share of fabrication jobs, which amount to c. RM300m, it still has some work to do before it could achieve our target replenishment rate of RM600m for FY15. However, our forecast is deemed conservative given that we have assumed relatively low earnings recognition from our new win assumption in FY15. While upstream outlook remains bleak for the moment, we believe more downstream fabrication jobs like Pengerang would fill in the gap as the projects which have secured FID from Petronas proceed in the near-term. To note, the group has one foot in with RM100m RAPID Package 5 secured recently and it look to add more RAPID jobs in the coming years.

Yard Optimisation programme encouraging. One of the main highlights of the group’s Yard Optimisation programme is the two 600MT Goliath cranes which could cater for higher specification and demanding fabrication jobs like TLP Malikai project. The first crane is expected to be up by Dec this year while the 2nd by Mar 2016. Upon completion, the group expects RM7-8m savings in crane leasing costs per annum as it is now leasing 3rd party cranes for several of its projects. Moreover, it has also consolidated its piping operations at one location with the brand new Centralised Piping Workshop which results in better project flow execution and control.

Busy year for Marine division. In contrast to its slowing fabrication business, the group’s Marine division is expected to be busy in the medium-term with a slew of jobs flowing in. Naga 2, a Jack Up rig from UMWOG (NOT RATED) has just departed from the yard’s dock and currently it is busy with several projects namely refurbishment for FSO Cendor, life extension for MISC’s LNG vessel Puteri Intan, refurbishment of FSO Nautica Bergading and etc. This division is expected to remain strong in medium-term with more aged local LNG vessels expected to come in the yard for more life extension projects in the next few years.

Upgrade to Market Perform, no catalyst in sight. We have upgraded the stock to MARKET PERFORM from UNDERPERFORM previously due to its better risk-reward ratio post share price weakness recently. However, we believe headwinds still persist for the company with no major catalysts in sight in the near-term. TP maintained at RM1.00 pegged to CY16 12x PER, which is slightly higher than Big Cap O&G’s target PER of 10-11x under USD40/bbl average oil price scenario due to its strong net cash balance sheet position and growing Marine division, which has attracted international clients.

Source:Kenanga Research - 3 Sep 2015