News

Yesterday, MHB’s corporate website issued a press release announcing that the group has secured multiple contracts collectively worth RM527m for offshore structure fabrication and RAPID electro-mechanical, piping and structural works, which are expected to keep the group busy until mid-2017.

It consists of:- -Fabrication of F12 Kumang Cluster gas development wellhead platform topside, jacket and associated system tie-ins. -RAPID Package-5 centralized piping fabrication work. -RAPID Package-5 RoG area piping and structural work. -RAPID Package-3 electro-mechanical, piping and structural work. -RAPID Package-22 plate structure prefabrication and fabrication work.

Comments

This is not entirely a surprise to us as the group has already shown clear intention earlier this year of looking out for more downstream fabrication jobs like RAPID in view of the persistent weakness in the O&G upstream sector.

These contracts will not change our forecast assumptions as we have earlier assumed yearly replenishment of RM1.5b for the group compared to RM975m secured by the group to-date.

Overall, this is a positive to the group as this indicates the group’s head-start into the downstream fabricating business, which is expected to boom in the coming few years due to the progressing RAPID project.

Operating margins are expected to be 5-10% for the projects secured on average while profitability of the projects still boils down to the company’s project execution ability and cost discipline.

Outlook

Tender book of the group dropped to RM4b from its previous guidance of RM7b, of which RM1.8b is from ongoing bid for several RAPID packages and the remaining from local and overseas bids.

We believe the fall in tender-book is due to the exclusion of EPCC contract for the Kasawari gas project which was originally scheduled to be awarded in Feb 2015 but had been delayed. Being one of the three shortlisted players, this job is supposed to provide a huge boost to the group’s dwindling order-book.

The huge reduction in tender-book further exerts pressure on its contract replenishment and yard utilisation. Going forward, we foresee its already low fabrication job margins to pare down further in the midst of a more challenging O&G industry.

Marine repair segment is anticipated to be relatively resilient compared to the Offshore division as the company is focusing on higher value job to accommodate demand for dry docking repair and maintenance for rigs and storage tankers.

Forecast

We maintain our forecasts for now.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price is maintained at RM1.00 pegged to unchanged 0.6x PBV, which is at -1.5SD to the 5-year average.

Risks to Our Call

(i) higher-than-expected project wins, (ii) better-than expected margins, and (iii) acceleration in project executions.

Source: Kenanga Research - 23 Dec 2015