• Reiterate BUY, new MYR0.59 TP from MYR0.55, 22% upside. We are positive on Malaysia Marine & Heavy Engineering’s latest MYR4.5bn contract win, as this triples the value of its orderbook to MYR6.6bn and points to a stronger heavy engineering segment. While execution and cost management remain the key to a successful project delivery, we also believe that MMHE continues to benefit from the recovery of the oil & gas industry.

• A sizeable win. MMHE secured a c.MYR4.5bn contract from Petronas Carigali (PCSB) for EPCIC services on the Kasawari Carbon Capture & Storage (CCS) project, which is located off the coast of Sarawak. This contract will involve a collaboration between MMHE and PCSB, where the job scope includes the construction of a: i) 14,000-tonne topside, ii) 15,000- tonne 8-legged jacket of the CCS platform, and iii) bridge linking to the Central Processing Platform (CPP).

• The Kasawari CCS project is scheduled to kick off by the end of 2025. Construction works on this project will take about 35 months, and the group has entered into the engineering and procurement phase. First steel cut is guided for 2Q23. Meanwhile, management also guided that some of the sub-contractors are those that have previously worked on the Kasawari Phase I project – so they should have the necessary skills and competencies to deliver. Upon completion, the Kasawari CCS will have the capability to capture up to 3.3 mtCO2 pa, making it the largest offshore CCS project in the world by volume of carbon dioxide captured.

• Outlook. Post contract win, MMHE’s orderbook has tripled to MYR6.6bn – which is a strong indicator of the recovery of its heavy engineering segment. Other projects include Rosmari Marjoram (awarded in September), Kasawari Phase I, and Jerun. Its tenderbook has guided at MYR10-11bn in 2023-2025. The group is optimistic of its latest win, as it shows MMHE’s cost competitiveness in delivering integrated EPCIC solutions, which could lead to further project wins. With the expectation of raw material prices subsiding, this could garner more award announcements in the coming quarters as well as provide further upside to the group’s bottomline.

• BUY. Based on its previous loss-making track record, we project a conservative EBIT margin of 1%, which translates to c.MYR45m. Following this, we increase our FY22-24 earnings estimates by 18%, 29% and 7%. Our new TP of MYR0.59 is pegged to 0.5x FY23 P/BV (+0.5SD from the 5- year mean), and includes a 2% ESG premium, due to MMHE’s 3.1 ESG score.

• Key downside risks include a delay in execution, higher material costs, and labour shortages.

Source: RHB Research - 30 Nov 2022