• Keep BUY and MYR0.85 TP, 13% upside with c.1% FY23F yield. We are upbeat on Malaysia Marine and Heavy Engineering’s latest contract win as it further strengthens the company’s position in the heavy engineering space. We believe both its engineering and marine segments are set to jointly record a 3-year earnings CAGR of 86.9% over FY22-25.

• Another contract win. The group’s wholly owned subsidiary, Malaysia Marine and Heavy Engineering SB, secured a c.MYR1.4bn contract from Carigali-PTTEPI Operating Company (CPOC) for the engineering, procurement, construction & installation (EPCI) of: i) Five wellhead platforms, ii) five subsea pipelines, and iii) host tie-in works. The contract is for the Joint Development Area (JDA) Field Development Project (Phase 6) which is located in the Malaysia-Thailand Joint Development Area (MTJDA). The five wellhead platforms will have an average weight of 2,000 tonnes.

• Construction works on this project will take about 22 months, with the first steel cut expected in 3Q23. Management guided that construction will be done in the east yard, which is undergoing a reactivation process – due to the anticipation of more jobs coming in. It is expected that windfarm projects will take up 60% of yard utilisation.

• Outlook. This is MMHE’s third win, after having scored two projects in 1H22 – which is a testament to the recovery of the oil & gas industry. The CPOC contract brings the company’s orderbook to MYR7.7bn, which is a record high. Other projects include Rosmari Marjoram (awarded in Sep 2022), Kasawari CCS (awarded in Nov 2022), and Jerun. The recovery of the heavy engineering division, coupled with the strong marine business, is set to anchor MMHE’s earnings growth moving forward.

• BUY. Due to the group’s loss-making track record, we project a conservative EBIT margin of 1%, which translates to c.MYR14m in earnings. We have also imputed another MYR1bn orderbook replenishment assumption for FY23. Following this, we increase FY23-25 earnings estimates by 3%, 4% and 6%. Our TP of MYR0.85 remains unchanged, and is pegged to 0.7x FY23 P/BV (+1.5SD from the 5- year mean), with a 2% ESG premium built in as per our in-house proprietary methodology. This is due to MMHE’s 3.1 ESG score, which is one notch above the country median.

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

Source: RHB Research - 14 Feb 2023