MHB announced two new heavy engineering contract wins. While values were undisclosed, we guesstimate values to sum up to RM200-RM300m, fetching low-teens operating margins. Overall, we are positive on the awards, further strengthening its order-book (RM2.7b as at end-3QFY19). Meanwhile, tender-book of RM13.7b could also provide for further opportunities. Maintain OP and TP of RM1.05, with further wins and earnings turnaround as key catalysts.

Awarded two contracts. MHB announced that it was awarded two contracts; (i) Bekok Oil EPCIC contract from Petronas Carigali, and (ii) EPCC contract for Bergading MRU module from HESS (further details of the contracts below). While the contract values were undisclosed, we guesstimate each of the contracts to be worth RM100m-RM150m in value, thus summing up the two contracts to a total win of RM200mRM300m.

Positive on the contract win. Overall, we are positive on the contract wins, with this being the second win YTD (after the Kasawari EPCC contract award), bringing YTD wins to ~RM2.5b. We expect these two contract wins to fetch roughly low-teens operating margins. The two contracts would also add positively to its order-book, standing at RM2.7b as at end-3QFY19. Moreover, we believe these contract wins come in tandem with increased offshore jobs flow not just for MHB, but for the industry as a whole, in which we are starting to see a pick-up in upstream activities. This also in-line with Petronas’ expected increase in capex spending.

Order book at a multi-year high. On the back of recent contract wins, MHB’s order-book is currently at a multi-year high, thus providing revenue visibility well over the next 3-4 years. Meanwhile, tender-book of RM13.7b as at end-3Q19 (significant jump QoQ from RM3.2b) signifies greater opportunities in the market, thus prompting us to be more bullish towards the name and the space. Do note that given its delayed earnings recognition nature, we expect the earnings contribution to be back loaded towards the later periods of the projects. Nonetheless, given its healthy multi-year high order-book, we believe an earnings turnaround should be seen eventually.

Maintain OUTPERFORM, with unchanged TP of RM1.05 pegged to 0.7x FY20E PBV – roughly in-line with its 5-year mean valuations. No changes were made to our FY19-20E earnings, as we deem the contract wins to be in-line with our replenishment assumption of RM2.5b for the year.

We continue to like MHB, with key catalysts to include further contract wins, and turnaround in earnings, underpinned by its robust order-book and tender-book. MHB is also the only few oil and gas company which has a net-cash balance sheet.

Risks to our call include: (i) lower-than-expected marine activities, and (ii) higher-than-expected costs in heavy engineering.

Source: Kenanga Research - 3 Dec 2019