MMHE : Maintain BUY at RM4.50 with revised TP of RM5.19

MMHE ready for more in 2QFY11

Malaysia Marine and Heavy Engineering Holdings Bhd
(Nov 23, RM4.48)
Maintain buy at RM4.50 with revised target price of RM5.19 (from RM4.72): Annualised net profit made up 46% of our full-year estimates and 49% of consensus. While profit was down 30% quarter-on-quarter (q-o-q), on a year-on-year (y-o-y) basis, the group’s net profit for 1HFY11 has ballooned by 184.5%. As expected, revenue has come in lower this year as the Turkmenistan Phase 1 job is near completion. However, the group’s net margins have grown to 8.6% for 1HFY11 compared with only 2.1% in 1HFY10, as the Gemusut Kakap FPS (floating production system) job is in the fabrication stage. The second quarter also marks the end of the Tangga Barat processing platform job which was worth RM848 million, which also explains the drop in earnings on a q-o-q basis.

We believe that MMHE’s earnings will be good y-o-y, but not exciting q-o-q from here into mid-FY12 as it reaches the tail end of its existing RM5 billion order book. We expect at least RM4 billion of job replenishment to kick in 1HCY11. Jobs that we prospect include Malaysia’s first Tension Leg Platform for which MMHE has been approved as the yard of choice. What waits to be decided for that job is the design contractor, which appears to be a race between Modec, Floatec and SBM Offshore. We also expect the group to snag some shallow water jobs and marine conversion jobs coming from the Petronas re-gassing project. Along with that, we view that once Phase 1 is completed in Turkmenistan, Phase 2 should come into play.

We have some indications that the marine segment may see improvement come next year with revived global FPSO demand and also repair jobs. As such, we are upping our estimates slightly to reflect this improvement. Our FY11 estimates remain unchanged and FY12F numbers are raised by 13.7% and FY13F by 1%. Our estimates for the E&C segment remain unchanged and continue to be conservative as we believe that large, new, long-term projects would not contribute significantly in their initial year.

We continue to rate MMHE a “buy” and raise our target price in line with our earnings upgrade. We continue to peg CY11 EPS to a PER of 20 times, which represents the average of peak cycle industry PERs, to derive a target price of RM5.19 (previously RM4.72). — ECM Libra Investment Research, Nov 23