MMHE has secured a new RM1bn contract from Petronas Carigali. The contract involves Engineering, Procurement, Construction, Installation and Commissioning (EPCIC) works for the Central Processing Platform (CPP) at Bokor Phase 3 Re-Development Project. First steel cut is expected to commence in 3Q18, and the project is targeted for completion in mid- 2Q20. Bokor field is a mature brownfield located offshore Sarawak (water depth: 70 m).

Our Take

• This is MMHE’s first contract announcement win for the year. This new project is a positive surprise, given its substantial contract value. Recall that MMHE has not secured a major project exceeding RM1bn in value since Malikai TLP in Feb-13. Assuming a net margin of 4%, this new contract could potentially contribute profit of RM6mn/18mn in FY18/19. Inclusive of this new project win, we estimate that the group has outstanding orderbook of RM1.6bn.

• On the flipside, we are disappointed by the late commencement date of this new project (1st steel cut: 3Q18). Therefore, we deem this contract as part of FY18 orderbook replenishment. Furthermore, profit recognition will likely commence later, starting from FY19. Recall that MMHE applies “square method” accounting for complex EPCIC projects – which translates to back loaded profit recognition.

Impact

• This new contract win exceeds our assumptions of RM500mn orderbook replenishment for FY18. Accordingly, we tweak our FY18 assumption higher to RM1.5bn. As a result, our FY18/19 core profit forecast is raised to RM24mn/48mn (previous: RM18mn/30mn).

Valuation

• We roll forward our valuation base year to MMHE to CY18, but our TP of RM0.96 based on 0.6x FY18 P/B remains intact. Maintain Sell as nearterm earnings weakness persist, underpinned by low yard utilization.

Source: TA Research - 18 Apr 2017