AmInvestment upgrades MMHE to Buy, sees brighter prospects

Malaysia Marine and Heavy Engineering Holdings Bhd's (MMHE) earnings jumped 352% to RM36.43mil in the third quarter ended Sept 30, 2013.

KUALA LUMPUR: AmInvestment has upgraded its recommendation for Malaysia Marine and Heavy Engineering (MMHE) from Hold to a Buy with a higher fair value of RM1.25 a share from RM1 previously.

The research house said on Thursday this was based on an FY16F price-to-earnings (PE) of 15 times and 10% discount to its two-year average of 16.4 times. 

 “We have largely maintained MMHE’s FY16F earnings which is 17% above consensus. 

“However, we raise FY17F net profit by 8% with a RM200mil increase in new order intake assumption to RM2.5bil and introduce FY18F earnings with an 11% growth premised on new orders of RM2.7bil,” it said. 

MMHE is currently trading at an FY16F PE of 11 times, way below its two-year average of 16 times.

AmInvestment said prospects for MMHE, which will be positioned on a cleaner slate after providing for RM100mil asset impairments in 4QFY15, have brightened.

It cited the multiple new contracts expected to be awarded from Petronas’ nearby Refinery and Petrochemical Integrated Development (RAPID) in Pengerang. 

“MMHE’s tender book has doubled from RM4bil in the previous quarter to RM8.4bil currently, of which 76% stems from domestic projects which provide a high degree of visibility. MMHE has already secured four subcontracts worth RM319mil from the RAPID project currently, with significantly more jobs expected this year,” it added.

 AmInvestment said assuming that MMHE manages to secure 50% of these orders (versus management’s higher expectations of 60%), there could be additional orders of RM4.2bil which is 5.5 times FY15 order intake of RM757mil and four times its current order book of RM1.1bil. 

“We understand that management is fairly confident of securing these domestic projects, while the overseas need-driven projects are likely to proceed as planned. MMHE’s yard can accommodate these new jobs as its West yard is only half utilised and expected to be largely unoccupied by the year-end if no new contracts are secured. 

“The East yard, which is undergoing refurbishment, is currently unutilised while its workshops are earmarked for the new RAPID jobs. 

“While onshore projects are expected to be slightly lower than offshore jobs, we expect the additional RAPID projects (of which a large portion will be prefabricated) to offer greater cost efficiencies and margin certainty compared with many past offshore contracts which subsequently faced variation orders and delays,” it said.