We begin coverage with an Add call. A growing order book and successful FPSO and T&I ventures are the potential re-rating catalysts. We value the stock at a CY15 P/E of 16.4x, a 30% discount to the average P/E of the oil & gas big caps. THHE replaces Perisai as our top pick among the oil & gas small caps. 

Formerly known as Ramunia, TH Heavy Engineering (THHE) has its roots in fabrication, where operations are carried out at its 57-acre yard in Pulau Indah. To compete better with its bigger rivals, the company is upgrading and doubling the yard's capacity to 20,000 tonnes p.a. by end-3Q14. Furthermore, THHE's JV with US-based McDermott allows it to tap on the American company's 300-acre Batam yard and engineering capabilities. 

To reduce its dependence on fabrication contracts which tend to be lumpy, THHE has made inroads into the floating production, storage and offloading (FPSO) and transport and installation (T&I) businesses whose income is longer term in nature. In May 2014, THHE secured a 9-year US$372m FPSO contract, with extension options of up to 10 years. Its key FPSO asset is 80%-owned Deep Producer 1 (DP1). The company has exposure to T&I through its 30% stake in McDermott's pipelay barge DB30. 

The US$372m FPSO contract catapults THHE's order book to a new record of RM1.6bn. The only way for the order book to go is up following the ongoing yard expansion. The company also plans to add three more FPSO vessels over the next five years. 

We are the second research house to cover THHE, which has been largely overlooked by the market. The stock presents the most attractive growth story in our oil & gas portfolio, offering a 3-year EPS CAGR of 106%, significantly above the sector average of 34%. Yet, its valuations are the cheapest, at 8-12x FY15-16 earnings. Earnings visibility is solid given the FPSO contract.

Source: CIMB Daybreak - 21 July 2014, Full PDF Report