Malaysia Marine and Heavy Engineering Holdings Bhd
(July 21, RM1.16)
Maintain sell with an unchanged target price of RM1. Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) has secured approximately RM395 million in contracts year-to-date, including RM230 million worth of offshore contracts and RM165 million worth of marine contracts.

While the headline RM395 million new contracts win may interest some market participants, which is already surpassing the RM356 million order intake for financial year 2014 (FY14), this is by no means remarkable.

Stripping off the RM80 million “bread and butter” marine repair work and RM135 million non-core hook-up and commissioning (HUC)/top-side modification work, the group added merely RM180 million of higher value vessel conversion/engineering, procurement, construction and commissioning (EPCC) work.

Also, there may still be downside risk to our 2015 contract win forecast of RM1 billion offshore and RM250 million marine work.

The domestic fabrication market is still quiet, with no major EPCC contracts scheduled to be awarded in the second half of 2015 (2H15).

Several major projects such as the Kasawari central processing platform  contract and the Sepat Gas project have been delayed to 2016 or shelved until 2017.

We expect MHB to complete the SK316 and Malikai tension leg platform contracts by early 2016, and the group will likely need to aggressively replenish its order book to fill its yard.

MHB is bidding for RM4.5 billion worth of projects in overseas markets, especially in the Middle East and Africa, for both offshore and onshore projects.

We understand that its local tender book is approximately RM2.6 billion.

While we like the management’s aggressiveness in bidding for the overseas work, we are cautious about the execution and profitability of these contracts, as MHB has limited overseas experience and little exposure to onshore projects.

Also, the overseas projects will likely have higher country and execution risk.

While the group’s venture into the HUC segment may boost its revenue, we believe this business may dilute its overall profit margin, as it does not own a comprehensive fleet of vessels to support its HUC operations.

The outsourcing and chartering of third-party vessels may erode the overall project margin. — Affin Hwang Capital Research, July 21

This article first appeared in The Edge Financial Daily, on July 22, 2015.