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TA SecuritiesA Member of the TA Group
C O M P A N Y U P D A T E
Friday, November 08, 2013
FBM KLCI: 1,806.61
Sector: Oil & Gas
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048
Page 1 of 9
Malaysia Marine & Heavy Engineering TP: RM4.46 (+15.0%)
Ripe for Order Wins Last traded: RM3.90
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Hold TA Research Team Coverage +603-2072-1277 ext:1265 [email protected] www.taonline.com.my
We revise our Sell recommendation on MMHE to Hold with TP of RM4.46
based on upgraded multiple of 25x FY14 P/E (previous: 17x). At our TP,
MMHE would be trading at FY15 P/E of 23x, and at a 33% discount to its
average 3-year historical forward P/E of 38x (Figure 5). We believe the
rerating is timely given improved earnings prospects on the back of
substantial orderbook uplift in FY14/15. MMHE is a strong contender for
major fabrication contracts that are ripe for award after prolonged delays.
Furthermore, margin will also receive a boost on the back of: 1) recognition
of Change Orders (CO), and 2) cost optimisation on the back of supply chain
reforms.
(1) ORDERBOOK TURNAROUND
Orderbook Momentum Picking Up. MMHE’s new order intake in 2013 (YTD:
RM2.74bn) for offshore projects is more than triple of what it achieved in the
previous year (RM658mn) and significantly higher than 2011 (RM1.8bn). This
was on the back of 2 sizeable project wins, namely Malikai TLP (RM1.2bn) and
Block SK316 (circa RM1.5bn). The uptick in order momentum is likely to
continue over 2014-15 given that MMHE is frontrunner for numerous
fabrication projects (Figure 1) that are ripe for award.
Figure 1: Potential Projects Wins
Project Operator Estimated
Value Requirements Expected Award
Zetung, Anggerik, &
Kezumba (North
Malay Basin)
Hess USD3.0bn WHPs
(1 for each field)
2015
Ubon Chevron USD1.5bn
(RM4.7bn) 20k mt CPP
2014
(1st gas: 2017)
West Sepat Gas Petronas USD1.5bn
(RM4.7bn)
27k mt CPP,
WHPs
2014
(1st Gas: 2016)
Rotan Floating LNG Petronas USD2.5bn
(RM7.9bn) FLNG Vessel
2014
(1st Gas: 2016)
Bokor, Dulang and
Semarang, (EOR ) Petronas RM3.0bn
CPPs
(1 for each field) 2015
Source: TA Research, Various
Immediate Catalyst from West Sepat. We believe that MMHE-Technip stands
a high chance of securing the USD1.5bn FEED+EPCIC contract for West Sepat,
which also saw the submission of bids by SAKP-Saipem and THHE-McDermott
earlier in June 2013. Although SAKP-Saipem was touted as frontrunner for this
multi-platform gas project, we believe that MMHE has greater capacity to
undertake this contract given its stronger track record and ample yard space.
Given that it would require at least 2 years for fabrication of the platform, we
expect this contract to be awarded by 1H14, in-time to meet Phase 1’s targeted
1st gas by 2016.
7
3.
9.
SHARE INFORMATION
Listing Code MMHE MK
Stock Code 5186
Listing Main Market
Share Cap (m) 1,600
Market Cap (RM 'mn) 6,240
Par Value (RM) 0.50
52-wk Hi/Lo (RM) 4.97/3.14
12-mth Avg Daily Vol ('000) 1,593
Estimated Free Float (%) 19
Beta 1.0
Major Shareholders (%)
MISC Bhd 66.5
Technip SA 8.5
FORECAST REVISION
FY13 FY14
Forecast Revision (%) -6 14
Revised net profit (RMmn) 195.6 285.7
Consensus (RMmn) 210.6 254.0
TA/Consensus (%) 92.9 112.5
Previous Rating
FINANCIAL INDICATORS
FY13 FY14
Net Debt/Equity (%) Net Cash Net Cash
FCFPS (sen) 34.1 13.4
P/FCF (x) 11.4 29.1
ROA (%) 4.2 5.6
ROE (%) 7.8 11.0
NTA/Share (RM) 1.5 1.6
P/NTA (x) 2.5 2.4
SHARE PERFORMANCE
Price chg (%) MMHE FBM KLCI
1 mth 1.6 1.7
3 mth -7.8 1.5
6 mth 2.6 1.7
12 mth -19.4 9.8
Sell(Upgrade)
(12-Mth) Share Price relative to the FBM KLCI
Source: Bloomberg
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 2 of 9
Boost from FLNG Sub-Contracts. Results for the FEED stage of the massive
USD2.5bn Rotan FLNG with capacity of 1.5mn tpa were announced earlier in
June 2012. The shortlisted contenders include two consortiums, namely JGC-
Samsung Heavy Industries and Toyo Engineering-CB&I-Modec-IHI
Shipbuilding. Although local content requirements are not imposed on this
highly complex project, Petronas have granted bidders the option to work with
MMHE for the fabrication of the vessel. Therefore, we believe it is highly
plausible that MMHE may be awarded smaller sub-contracts for fabrication of
the FLNG parts such as the external turret.
North Malay Basin Projects Still Up for Grabs. MMHE was not prequalified
for the Bergading Central Processing Platform (CPP) project in favour of other
local yards including SapuraKencana (SAKP) and TH Heavy Engineering
(THHE). Nevertheless, MMHE may still grab a slice of the action at the North
Malay Basin as Hess will open the design competition for the Zetung, Anggerik,
& Kezumba (ZAK) wellhead platforms (WHP) which will be tied-in to the
Bergading CPP. Unlike the highly contested Bergading CPP, which attracted
international bids (i.e. Norway’s Aker Solutions, and Korea’s Samsung Heavy
Industries), Upstream reported that ZAK will mainly see participation from
Malaysian yards. This implies even higher winning chances for MMHE.
EOR Fields Delayed but not Shelved. Industry sources confirm that the
Bokor, Dulang and Semarang CPP projects have been placed on the back-burner
for the time being. This has been the case with most Enhanced Oil Recovery
(EOR) projects, including the Angsi Chemical EOR vessel, due to project
complexities. However, we understand that project feasibility studies are still
fluid at this juncture, and therefore we expect FEED tenders for these projects
to be announced within 2014-15. We believe that MMHE stands a high chance
of securing 1-2 CPPs given its track record in successfully completing the Tapis
EOR project.
But Not Upbeat on Ubon. MMHE was shortlisted as one of the eight
contenders for Chevron’s Ubon project, touted as one of the largest gas projects
at the Thai Malaysia Joint Development Area. However, we are not optimistic
on MMHE’s chances of securing the fabrication contract for this project. This is
given stiff competition from acclaimed international names such as Hyundai
Heavy Industries (Korea), McDermott (US), Saipem (Italy) and China Offshore
Oil Engineering (China). Despite being a wildcard, any new contracts from this
project would be a welcome boost to MMHE’s order backlog.
Low Base for Current Backlog. We estimate that MMHE’s current outstanding
orderbook (Figure 2) for offshore projects amount to circa RM3.05bn
(including the SK316 contract, which MMHE reports to be in excess of RM1bn).
This translates to roughly one year’s sales visibility for MMHE’s offshore
segment. A new major project (CPP with WHP and jackets) win worth circa
RM1.5bn would expand MMHE’s current backlog substantially by 50%.
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 3 of 9
Figure 2: Outstanding Orderbook (end-Sept 2013)
Source: Company
Advantage Over Local & Foreign Competitors. Despite an open tender
process, MMHE managed to edge out international competitors, including
Italy’s Saipem, for Malikai TLP and Block SK316. This is in spite of the fact that
MMHE’s submission was not the lowest-priced bid. In our view, this signifies
Petronas’ affinity for local yards to develop local talent and capabilities. In
addition, we believe that MMHE also has an advantage over local peers given its
Petronas parentage (owns effective 42% stake in MMHE via 63%-owned MISC
Bhd) and superior track record and yard capacity. MMHE is the only local yard
that has successfully completed highly complex projects, including: 1) EOR -
Tapis, 2) High Pressure-High Temperature (HPHT) - Kinabalu Topside, and 3)
deepwater - Gumusut Kakap.
Ample Yard Capacity. There is abundant space at MMHE’s Pasir Gudang yard,
which is the largest fabrication yard in Malaysia (197 acres, 130k mt p.a.) vis-à-
vis SAKP (273 acres, 100k mt p.a.) and THHE (57 acres, 10k mt p.a.). We
estimate that MMHE’s yard is able to accommodate up to a total of 6 CPPs at
any given time. MMHE’s yard will be largely empty by 1H14 given that 3 out of
MMHE’s 5 projects in hand have reached advanced stages of completion (FPSO
Cendor: 96%, Tapis EOR: 89% and Kebabangan Northern Hub: 94%). With the
two remaining projects in hand, (Malikai TLP: 26k MT & SK316: 26.4MT), we
estimate that MMHE’s current yard utilisation is approximately 40%, which
implies room for at least 2-3 major CPPs.
(II) EARNINGS RECOVERY
New Orders will Drive Earnings. Shortage of new orders in 2012, exacerbated
by cost overruns and project delays, had resulted in weak earnings (Figure 3)
and margin (Figure 4) in FY13 (-5% YTD). Nevertheless, we anticipate that
MMHE’s earnings will recover in 2013-14 on the back of: 1) recognition of
deferred profits from Malikai TLP starting in 1Q14, 2) billings for Block SK316,
a fast-track project, which we expect to materialise by 2H14, and 3) recognition
of change orders (CO) from completed projects, including FPSO Cendor, Tapis
EOR and Kebabangan. To recap, MMHE has been in negotiations with clients
since 3Q12 for recovery of costs for additional work done on various projects.
We also understand that write-back of these COs can only be recognised post-
completion of a project. We estimate that prior provisions for FPSO Cendor
alone amount to a substantial RM50mn.
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 4 of 9
Figure 3: Quarterly Earnings
Source: Company, TA Research
Figure 4: Quarterly Margins
Source: Company, TA Research
TIP will Drive Efficiency. To recap, back in 2011, MMHE was dealing with an
excessive base of more than 200 external subcontractors and vendors, whom
were not selected on transparent basis. Given that 50%-70% of MMHE’s costs
were linked to external parties, this led to razor thin operating margins of 9%
and 7% in FY11 and FY12 respectively. Therefore, to rationalize its
subcontractor base and restructure its supply chain, MMHE implemented its
Transformation Initiative Program (TIP) in 2012. We believe that TIP will
gradually result in material efficiency gains for MMHE that will provide a much
needed boost to margin.
New Agreements Spur Competency. In March 2013, MMHE signed
framework agreements with 5 key subcontractors on the provision of
structural fabrication services. MMHE also inked long-term price agreements
with 19 vendors on the supply of piping, electrical, and other materials. Under
these agreements, suppliers have to fulfill MMHE’s assessment criteria such as
value-added services, work execution, timeliness, etc. These agreements enable
MMHE to source parts and services at the best cost and quality, in-line with
TIP’s objectives.
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 5 of 9
Impact
� We made the following changes to our earnings assumptions: 1) pushed
forward earnings recognition from Malikai TLP starting from 1Q14
(previous: 4Q14) in-line with management’s guidance, 2) reduced FY13
orderbook replenishment to RM3.0bn (previous: RM3.7bn) to approximate
9M13 YTD new order wins of RM2.7bn. This results in a -6%/14%/4%
change to our FY13/14/15 forecasts.
Valuation
� We upgrade MMHE to Hold from Sell previously as we revise our target
multiple to 25x FY14 P/E (previous: 17x). At our TP of RM4.46, MMHE
would be trading at implied FY15 P/E of 23x, and at a 33% discount to its
average 3-year historical forward P/E of 38x.
� We believe that the rerating is timely given enhanced news flow on new
projects and earnings recovery. MMHE is a strong contender for local
projects on the back of: 1) world class fabrication yard that is the largest in
Malaysia, 2) only local yard with experience and track record in completing
EOR, HPHT, and deepwater projects, and 3) strong Petronas parentage
(42% effective stake).
Figure 5: One-year Forward Rolling P/E (x)
10
20
30
40
50
60
70
No
v-1
0
Jan
-11
Ma
r-1
1
Ma
y-1
1
Jul-
11
Se
p-1
1
No
v-1
1
Jan
-12
Ma
r-1
2
Ma
y-1
2
Jul-
12
Se
p-1
2
No
v-1
2
Jan
-13
Ma
r-1
3
Ma
y-1
3
Jul-
13
Se
p-1
3
Fo
rwa
rd P
/E (
x)
Mean:37.6x
+1SD:48.4x
-1SD: 26.7x
Source: TA Research, Bloomberg
Figure 6: Peers Comparison
CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14
MMHE Hold 3.90 6,240.0 4.46 14.4 31.9 21.8 2.5 2.3 7.7 10.7 10.0 10.0 2.6 2.6
Perisai Buy 1.40 1,311.1 2.02 44.3 13.2 9.7 1.7 1.5 13.0 14.9 0.0 0.0 0.0 0.0
Pantech Buy 1.02 616.8 1.42 39.2 9.8 8.6 1.5 1.5 14.6 15.5 4.6 5.4 4.5 5.3
Pet Chem Hold 7.10 56,800.0 7.21 1.5 14.4 13.4 2.3 2.1 16.2 15.8 24.6 26.5 3.5 3.7
PetDag Sell 30.40 30,201.0 21.05 (30.8) 30.5 27.9 5.7 5.2 18.8 18.7 80.0 75.0 2.6 2.5
PetGas Sell 24.28 48,043.6 21.00 (13.5) 33.7 29.9 4.7 4.4 14.0 14.9 50.0 55.0 2.1 2.3
SK Petro Buy 4.12 24,687.9 5.24 27.2 24.8 18.8 3.7 2.3 8.8 9.7 0.0 0.0 0.0 0.0
Average 22.6 18.6 3.2 2.8 13.3 14.3 2.2 2.3
Upside
(%)
Tgt.Price
(RM)
Dividend Yield (%)Company
PE (x) PBV (x) DPS (sen)ROE (%)Call
Mkt Cap (RM
mn)Price (RM)
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 6 of 9
Figure 6: Earnings Summary
Income Statememt Balance Sheet
FYE 31 Dec (RMmn) 2011* 2012 2013F 2014F 2015F FYE 31 Dec (RMmn) 2011* 2012 2013F 2014F 2015F
Revenue 2,137.0 3,329.8 2,253.4 3,321.6 3,643.6 Fixed assets 1,090.6 1,441.0 1,743.5 2,196.9 2,688.5
EBITDA 234.6 300.1 255.1 366.6 403.0 Prepaid Land Lease Pymt 65.6 253.5 253.5 253.5 253.5
Depreciation (31.6) (57.3) (35.6) (44.8) (54.9) Others 61.1 107.4 110.2 113.1 116.1
Net finance cost 1.1 40.7 26.7 38.3 39.9 Non-Current Assets 1,217.3 1,801.9 2,107.2 2,563.5 3,058.2
Share of JCEs 46.8 (25.1) 2.8 2.9 3.0
Pretax profit 250.8 217.7 222.3 324.7 351.1 Inventories 25.6 11.6 27.0 39.8 43.6
Taxation (44.9) 25.5 (26.7) (39.0) (42.1) Trade and other rcvb 1,131.3 2,113.4 1,192.9 1,758.3 1,928.8
MI (0.3) (1.2) (0.0) (0.1) (0.1) Cash and Deposits 2,085.6 890.3 1,275.5 1,329.6 1,099.9
Net Profit 205.6 242.0 195.6 285.7 308.9 Others 2.7 0.1 0.1 0.1 0.1
* 9M FYE 31 Dec Current Assets 3,245.2 3,015.4 2,495.4 3,127.8 3,072.4
Per Share Data Total Assets 4,462.5 4,817.3 4,602.6 5,691.3 6,130.6
EPS (sen) 12.9 15.1 12.2 17.9 19.3
Gross DPS (sen) 10.0 10.0 10.0 10.0 10.0 Borrowings - - - - -
Book Value (sen) 151 157 159 167 176 Deferred tax liabilities 26.7 - - - -
Net Tang Asset (sen) 151 153 155 163 172 Non-current liabilities 26.7 - - - -
Ratios Borrowings - - - - -
FYE 31 Dec (RMmn) 2011* 2012 2013F 2014F 2015F Trade & other Payables 1,926.5 2,281.7 2,031.4 2,994.4 3,284.7
Valuations Others 85.1 24.8 24.8 24.8 24.8
PER (x) 30.4 25.8 31.9 21.8 20.2 Current Liabilities 2,011.6 2,306.4 2,056.2 3,019.1 3,309.4
Dividend yield (%) 2.6 2.6 2.6 2.6 2.6
EV/EBITDA (x) 17.7 17.8 19.5 13.4 12.8 Total Liabilities 2,038.3 2,306.4 2,056.2 3,019.1 3,309.4
P/BV (x) 2.6 2.5 2.5 2.3 2.2
P/NTA (x) 2.6 2.6 2.5 2.4 2.3 Share capital 800.0 800.0 800.0 800.0 800.0
FCF Yield (%) 10.5 -14.2 8.7 3.4 -1.1 Reserves 1,620.6 1,706.1 1,741.7 1,867.4 2,016.3
Minority Interests 3.6 4.8 4.9 4.9 5.0
Profitability ratios Equity 2,424.2 2,510.9 2,546.5 2,672.3 2,821.3
EBITDA margin (%) 11.0 9.0 11.3 11.0 11.1
EBIT margin (%) 9.5 7.3 9.7 9.7 9.6 Total Equity + Liabilities 4,462.5 4,817.3 4,602.7 5,691.4 6,130.7
PBT margin (%) 11.7 6.5 9.9 9.8 9.6
Net margin (%) 9.6 7.3 8.7 8.6 8.5 FYE 31 Dec (RMmn) 2011* 2012 2013F 2014F 2015F
ROE (%) 8.7 9.8 7.8 11.0 11.3 Cash Flow Statement
ROA (%) 4.4 5.2 4.2 5.6 5.2 Pretax profit 250.8 217.7 222.3 324.7 351.1
Depreciation 31.6 57.3 35.6 44.8 54.9
Liquidity ratios Net Interest (44.0) (40.7) (26.7) (38.3) (39.9)
Current ratio (x) 1.6 1.3 1.2 1.0 0.9 JCEs (46.8) 25.1 (2.8) (2.9) (3.0)
Quick ratio (x) 1.6 1.3 1.2 1.0 0.9 Working Cap Changes 554.7 (656.5) 654.9 384.7 116.0
Income Tax Paid (16.1) (11.4) (26.7) (39.0) (42.1)
Leverage ratios Others 11.5 (4.7) 0.0 0.0 0.0
Total Debt/ Assets (x) n.m. n.m. n.m. n.m. n.m. CF from Operations 741.8 (413.2) 856.6 674.1 436.9
Total Debt/Equity (x) n.m. n.m. n.m. n.m. n.m.
Net debt(cash)/ Equity (x) Net Cash Net Cash Net Cash Net Cash Net Cash Capex (95.4) (561.0) (338.0) (498.2) (546.5)
Interest coverage (x) n.m. n.m. n.m. n.m. n.m. Interest Received 50.3 40.7 26.7 38.3 39.9
Others 23.7 (101.7) - - -
Growth ratios CF from Investing (21.4) (622.1) (311.3) (460.0) (506.7)
Revenue (%) n.m. 17% -32% 47% 10%
EBITDA (%) n.m. -4% -15% 44% 10% Dividends (80.0) (160.0) (160.0) (160.0) (160.0)
PBT (%) n.m. -25% 2% 46% 8% Others (3.0) 0.0 0.0 0.0 0.0
Net Profit (%) n.m. -12% -19% 46% 8% CF from Financing (83.0) (160.0) (160.0) (160.0) (160.0)
EPS (%) n.m. -12% -19% 46% 8%
Net Cash Flow 637.4 (1195.3) 385.3 54.1 (229.7)
Key Assumptions Beginning Cash 1,448.1 2,085.5 890.2 1,275.5 1,329.6
Order Replenishment(RM mn) 2,950 3,400 3,400 Ending Cash 2,085.5 890.2 1,275.5 1,329.6 1,099.9
Marine Repair Sales Growth (%) 5% 5% 2% *
YE 31 Mar / ** 9M FYE 31 Dec with EPS and ROE annualized.
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 7 of 9
APPENDIX: Ongoing Projects from Recent (Oct 2013) Yard Visit
Figure 7: FPSO Cendor
Figure 8: Tapis EOR
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 8 of 9
Figure 9: Malikai TLP
TA SecuritiesA Member of the TA Group 8-Nov-13
Page 9 of 9
Figure 5: Kebabangan Northern Hub
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may
have an interest in the securities and/or companies mentioned herein.
for TA SECURITIES HOLDINGS BERHAD(14948-M)
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048
(A Participating Organisation of Bursa Malaysia Securities Berhad)
Kaladher Govindan – Head of Research