• Keep BUY and MYR0.60 TP, 24% upside. We are positive on Malaysia Marine & Heavy Engineering’s latest MYR1.5bn contract win, which brings its orderbook to c.MYR6.9bn. This marks the group’s second windfarm offshore substation (OSS) contract, following the first one secured in Nov 2023. While execution and cost management are crucial for project delivery, we believe MMHE will continue to benefit from the growing windfarm segment.

• Second OSS contract win. Wholly owned subsidiary Malaysia Marine & Heavy Engineering S/B secured its second subcontract from Petrofac International (UAE) for the EPC of an OSS high voltage direct current or HVDC platform in the Netherlands, with a value of MYR1.5bn. This OSS platform comprises a topside weighing c.30,000 tonnes (includes equipment) and c.10,000 tonne jacket.

• The duration of the subcontract is about 36 months, with fabrication expected to commence in 2025, similar to the first contract awarded. Management previously guided that windfarm OSS construction will be done at MMHE’s East Yard along with the Carigali-PTTEPI Operating Co (CPOC) job that was awarded in Feb 2023. In addition, the parties will also collaborate towards the possibility of fabrication works for another OSS unit of similar size.

• Outlook. We view this positively given the growing windfarm sector will provide earnings opportunities for MMHE. However, successful project execution is crucial to fully capitalise on this potential. With the new award, the group’s OSS windfarm contracts now total MYR2.7bn and we estimate this will increase its orderbook by 28% to c.MYR6.9bn (1Q24: MYR5.4bn). Ongoing projects include the Jerun, Rosmari-Marjoram, Kasawari carbon capture & storage (CCS), and the aforementioned CPOC job. MMHE’s tenderbook, which we estimate to be c.MYR4.5-5.5bn (1Q24: MYR6-7bn) following this contract win, mainly comprises wind farm and fixed facilities jobs. We see potential upside coming from the securement of an additional OSS unit of similar size.

• Maintain estimates. Due to MMHE’s loss-making track record, we project a conservative EBIT margin of 1%, which translates to c.MYR15m in earnings. We maintain our call and TP on this stock, as the contract value is within our replenishment assumptions. Our MYR0.60 TP is pegged to 0.7x FY25F P/BV (+1.5SD from the 5- year mean), with a 4% ESG discount built in as per our in- house proprietary methodology. This is due to MMHE’s 2.8 ESG score, which is two notches below the country median.

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

Source: RHB Research - 5 Jun 2024