Despite facing weaker contract replenishment for its fabrication division, we believe the marine business unit involving repair work and FPSO conversion will continue to underpin MHB’s earnings. Extension of Investment Tax Allowance for another three years will results in tax savings while new dry-docking facilities will expand its recurring income beyond 2020. All in, we tweaked our FY16/17E earnings slightly both by +3% and maintained MARKET PERFORM call with TP at RM1.25 pegged to 0.7x CY17 PBV.

Marine business unit offering steady income. The en-bloc agreements secured with customers from South Korea, Canada, Taiwan and Malaysia give MHB a booking schedule up to 2020. This will keep its marine repair division occupied and continuing to generate recurring income. In addition, the division aalso managed to increase its revenue per vessel by performing higher value work and more thorough services to clients. In FY15, marine repair division recorded 84% YoY growth in revenue to RM464.3m with only 75 vessels in its yard vs 102 vessels a year ago. Going forward, we expect this division to contribute stable earnings to MHB in the next few years.

New dry-docking facilities in the pipeline. With the great potential in marine repair, MHB is looking to spend an estimated RM450-500m in capital expenditure to build a new dry dock with a capacity of 400k dwt, a 68% capacity addition to its combined capacities of 590k dwt from its existing two dry docks at the West Yard. We understand that MHB is likely to fund this expansion through unutilised sukuk of RM1b despite sitting on a cash pile of RM922.8m as of 1Q16. This is positive to MHB as it will increase the proportion of recurring marine repair income and reduce its reliance on fabrication work where earnings is lumpy in the nature.

Order book replenishment risk persists. MHB’s order book stands at RM1.0b in 1Q16 vs. RM1.1b as at Dec 2015 after the inclusion of new contracts, spanning up to 2017. Order book replenishment continues to be a concern as the company only managed to secure RM109m in 1Q16. Tender book is worth RM7.4b of which RM1.75b are tenders submitted for 2016. Current year tender comprises c.RM425m worth of work from RAPID and RM750m tender to one CPP from Bokor EOR. We believe the contract award for the Bokor EOR could be delayed further to next year.

Anticipating lower contract win but higher contribution from MBU. We tweaked both FY16/17E earnings upward by 3% after factoring: (i) potential tax savings from 3-year investment tax allowance, (ii) 8%/14% higher contribution from marine business unit in FY16/17E arising from higher revenue but offset by (iii) lower contract win of RM500m/RM1.0b in FY16/17E vs. previous forecast of RM900m/RM1.5b.

Maintain MARKET PERFORM. MHB’s cash-in-hand has been growing steadily in the past two years to RM922.8m as of 1Q16, which is equivalent to RM0.58/share, 35% of its net asset. We do not discount the possibility of dividend pay-out to reward shareholders if MHB decides to fund its new dry dock through sukuk and there is no other major capital expenditure in the near term. Our TP is retained at RM1.25 pegged to 0.7x CY17 PBV.

Risks to our call include: (i) weaker-than-expected project wins, (ii) weaker-than expected margins, and (iii) lower contract replenishment risk.

Source: Kenanga Research - 20 Jul 2016