MMHE has secured MYR305m in new orders YTD. We maintain our NEUTRAL recommendation, with a MYR1.28 TP (from MYR1.27, 2% upside) based on a 25% discount on its BV/share. We raise our FY15/FY16F earnings by 8%/92%, factoring in new fabrication projects that it is confident of winning in early 2016. In our view, re-rating of the stock could only happen if MMHE manages to secure a major contract.

• Smaller contracts are coming through. YTD, MMHE has secured up to MYR305m worth of contracts. The majority of these are classified within its facilities improvement programme (FIP) award and involvehook-up and commissioning (HuC) works. The rest are made up of vessel maintenance and refurbishment works from its marine business unit (MBU).
• Near- to mid-term strategy. Due to the delay of major fabrication awards, which is affecting its offshore business unit (OBU) orderbook replenishment, the company is focusing on its MBU segment, which we understand is stable. This is because MMHE has repeat customers and clients for vessel refurbishments and maintenance. This unit has also been winning new customers lately. The West Yard, from where the MBU operates, is now 95% utilised, vis-à-vis the East Yard, which has a 65% utilisation rate.
• MYR7.2bn tenderbook. MMHE’s tenderbook currently stands at MYR7.2bn, with 63% of the bids coming from overseas and the remainder comprising domestic jobs. On the international front, it is bidding for offshore and onshore fabrication jobs in the Middle East, Africa as well as North America. MMHE is confident of securing at least one or two major projects by late 2015 or early 2016.
• Maintain NEUTRAL, with a MYR1.28 TP. We are maintaining our NEUTRAL call while we tweak our TP to MYR1.28 (from MYR1.27), based on an unchanged 25% discount to its FY15F BV/share. In our opinion, a re-rating for the stock can only occur if it manages to secure a major contract – which we do not expect to happen until early 2016.

Kasawari central processing platform (CPP). Other consortia bidding for the Kasawari CPP project are heavyweight names such as Saipem (SPM IM, NR), Hyundai Heavy Industries (009540 KS, NR), SapuraKencana Petroleum (SAKP MK, NEUTRAL, TP: MYR2.32) and unlisted Ranhill Worley SB. The Kasawari field is located offshore Sarawak in Block SK316. Recall that MMHE, in collaboration with Technip (TEC EN, SA), had secured the first CPP for the SK316 block. The CPP is currently 61% completed in the company’s yard. We believe MMHE is the frontrunner for the award of this project, since the company and its joint-venture (JV) partner have already conducted field studies for the SK316 field, along with winning the award of the SK316 CPP and wellhead platform (WHP). We understand that one of the bids MMHE is making is for the Kasawari CPP is worth MYR1.5bn. Recall that the initial award date for the CPP was due in April, but the tender submission was pushed back due to some technical changes that had to be made for the design of the WHP. We believe that the low crude oil prices at the start of the year also contributed to the delay of the award.

Marine business unit is busy. YTD, the company’s MBU has secured about MYR80m worth of contracts for vessel refurbishment. Management mentioned that its MBU is enjoying stable business – it has repeat customers and clients, but is alsoseeing a pick-up in work orders lately. Management also mentioned that, since the new contracts for its OBU have slowed down, the company’s near- to mid-term strategy is to focus on getting jobs for the MBU.

Facilities improvement programme. Early this month, MMHE was awarded a facilities improvement programme for West Malaysia operations. The award is worth MYR105m for a period of two years, with an option for an extension. The programmeinvolves major and minor fabrication works, construction, as well as retrofitting offshore structures. This is MMHE’s first foray into hook up, construction and commissioning (HuCC) segment. Although it is a small segment for the company at this moment, we understand that it is looking to grow this unit and will be considering branching out into transport and installation (T&I) jobs as well in the medium term. Currently, MMHE does not own any vessels for this FIP project and is utilising thirdparty vessels.

Tenderbook of MYR7.2bn. MMHE is currently bidding for MYR7.2bn worth of projects, the majority of it being overseas (MYR4.5bn) and the remainder from local jobs (MYR2.6bn). We understand that for the overseas projects, MMHE is bidding for projects from the Middle East, Africa, as well as Canada for offshore as well as onshore fabrication. We see this is a positive sign that it is moving away from the domestic market and venturing out to the international market. We believe, in the long term, this could enable the company to build up its brand and operate on the same level as other major fabrication players. Locally, the Kasawari CPP makes up the majority of the tenderbook, while the rest are for Refinery and Petrochemical Integrated Development (RAPID)-related subcontracting works as well as facilities improvement bids.

Orderbook replenishment. Although MMHE has a tenderbook of MYR7.2bn, we understand that major contract wins might only come in early 2016. We do not expect it to win any major contracts for 2015, except for small jobs mainly coming from its MBU. Although the company’s near- and mid-term strategy is to focus on its MBU and grow its HuC segment, we understand that the OBU and the fabrication business is still its bread and butter.

Big projects remain on schedule. The construction of the hull and top side of the tension leg platform (TLP) Malikai is now 80%-completed and expected to be rolled out at the end of 2015. The SK316 CPP and WHP are currently 75% completed, and it expects to roll these out in 3Q15. Besar A’s jacket and topside are currently about 30% finished and are expected to be ready by end-2015.

Balance sheet. As of 1Q15, MMHE is in a net cash position of MYR613m. We believe that it is keeping the cash for now and leaving its options open at this point as it prepares to bid for several big projects. Note that the company will not be paying the lucrative dividends as it did in the past due to the downturn, but we believe MMHE will start paying out dividends again once its low orderbook replenishment rate situation is resolved.

Valuation. Our TP of MYR1.28 is based on a 25% discount to its FY15F BVPS. We believe the discount is justified, given that its East Yard is underutilised at the moment due to MMHE’s low orderbook replenishment rate (65% utilisation). On a P/E basis, as of its latest closing price, MMHE is currently trading at 21.5x, which we deem to be expensive compared to its other oil & gas peers. Note that in FY15F, MMHE may record earnings decline due to its low orderbook replenishment rate. Wewould like to point out, though, that its NTA/share is at MYR1.66.