Stock Name: MHB
Company Name: MALAYSIA MARINE AND HEAVY ENG
Research House: RHB
Malaysia Marine and Heavy Engineering Holdings Bhd
(March 28, RM6.77)
Initiate coverage at RM6.89 with underperform rating and fair value of RM6.26: Petroliam Nasional Bhd's (Petronas) capex commitment of RM250 billion over the next five years suggests a positive contract pipeline for the domestic oil and gas sector. We expect the spending to be focused on: (i) enhanced oil recovery (EOR);(ii) marginal and deepwater oilfield developments; (iii) brownfield works; and (iv) new oilfield discoveries. However, more importantly the focus will be on domestic spending.
For MMHE, we believe that order replenishment is relatively assured for 2011/13, but the major projects are already known and mostly factored into earnings assumptions. Margins could become more volatile as contracts move to 'fixed-cost' structure. The Turkmenistan yard provides Caspian exposure, but prospects hinge on discussions with the Turkmenistan government which remains undecided.
Risks including the over-dependence on Petronas heighten the concentration risk, but this is mitigated by major contract flows in the medium term. Keen competition in all market segments could limit its ability to penetrate new markets and a sharp rise in material costs could erode margins for 'fixed-cost' contracts. Cyclical risks of the crude oil price could lead to projects being shelved or delayed.
We highlight that we are still bullish about the sector and there are still significant projects to be executed. In this regard, we have assumed big contract wins of RM4.2 billion to RM4.9 billion per year for MMHE's engineering and construction division for FY11/13. However, we note the challenge for the company is not order book replenishment (which is assured through its Petronas link), but to translate contract wins into strong earnings growth. On this point, we are less confident and at worst, we believe MMHE's earnings growth will peak this year. This is reflected in our FY12/13 earnings growth estimates of 1.8% and 7.6% respectively.
We initiate coverage with an 'underperform' call. As for valuations, while we agree that MMHE's close link to Petronas deserves to be rewarded with a premium in the domestic context, we believe an eight to nine times premium over domestic peers is excessive in light of the pedestrian earnings growth forecasts. Moreover, in the longer term, we believe MMHE will come under increasing pressure to seek growth from overseas, thus placing it in direct competition with international peers who are trading at an average of 15'' to 16 times. For now, we continue to accord MMHE a valuation premium, but at a more realistic 21 times CY11, above Kencana at 20 times. This implies a fair value of RM6.26, or 8.7% below current levels. ' RHB Research, March 28
This article appeared in The Edge Financial Daily, March 29, 2011.
Company Name: MALAYSIA MARINE AND HEAVY ENG
Research House: RHB
Malaysia Marine and Heavy Engineering Holdings Bhd
(March 28, RM6.77)
Initiate coverage at RM6.89 with underperform rating and fair value of RM6.26: Petroliam Nasional Bhd's (Petronas) capex commitment of RM250 billion over the next five years suggests a positive contract pipeline for the domestic oil and gas sector. We expect the spending to be focused on: (i) enhanced oil recovery (EOR);(ii) marginal and deepwater oilfield developments; (iii) brownfield works; and (iv) new oilfield discoveries. However, more importantly the focus will be on domestic spending.
For MMHE, we believe that order replenishment is relatively assured for 2011/13, but the major projects are already known and mostly factored into earnings assumptions. Margins could become more volatile as contracts move to 'fixed-cost' structure. The Turkmenistan yard provides Caspian exposure, but prospects hinge on discussions with the Turkmenistan government which remains undecided.
Risks including the over-dependence on Petronas heighten the concentration risk, but this is mitigated by major contract flows in the medium term. Keen competition in all market segments could limit its ability to penetrate new markets and a sharp rise in material costs could erode margins for 'fixed-cost' contracts. Cyclical risks of the crude oil price could lead to projects being shelved or delayed.
We highlight that we are still bullish about the sector and there are still significant projects to be executed. In this regard, we have assumed big contract wins of RM4.2 billion to RM4.9 billion per year for MMHE's engineering and construction division for FY11/13. However, we note the challenge for the company is not order book replenishment (which is assured through its Petronas link), but to translate contract wins into strong earnings growth. On this point, we are less confident and at worst, we believe MMHE's earnings growth will peak this year. This is reflected in our FY12/13 earnings growth estimates of 1.8% and 7.6% respectively.
We initiate coverage with an 'underperform' call. As for valuations, while we agree that MMHE's close link to Petronas deserves to be rewarded with a premium in the domestic context, we believe an eight to nine times premium over domestic peers is excessive in light of the pedestrian earnings growth forecasts. Moreover, in the longer term, we believe MMHE will come under increasing pressure to seek growth from overseas, thus placing it in direct competition with international peers who are trading at an average of 15'' to 16 times. For now, we continue to accord MMHE a valuation premium, but at a more realistic 21 times CY11, above Kencana at 20 times. This implies a fair value of RM6.26, or 8.7% below current levels. ' RHB Research, March 28
This article appeared in The Edge Financial Daily, March 29, 2011.
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