April 25, 2011

MHB - MMHE: M&A talk chugs into motion

Stock Name: MHB
Company Name: MALAYSIA MARINE AND HEAVY ENG
Research House: ECMLIBRA

Malaysia Marine & Heavy Engineering Bhd
(April 25, RM6.89)
Maintain hold at RM6.90 with target price of RM7.25
: According to The Edge, MMHE is said to be looking at taking over either some or all of Sime Darby's oil and gas (O&G) assets which are parked under Sime Engineering Sdn Bhd.

It was also said that MMHE was not the only interested party and there are two others eyeing Sime's assets.

MMHE has so far denied that it has been having discussions with Sime Darby but did not rule out the need to grow organically or through M&A.

This comes as no shocker as the consolidation of O&G fabricators in Malaysia was clearly spelled out in the Economic Transformation Programme. The government's intention is to create a regional fabrication champion to rival the likes of Singapore's Keppel FELS Ltd and Sembcorp Marine Ltd.

The news is a definite positive for MMHE should the deal come into fruition. MMHE is currently almost 90% utilised with jobs like the Gemusut-Kakap FPS taking up the bulk of its capacity in Malaysia. As such, the group has not added on new jobs for more than 24 months.

The only way for the group to grow would be to acquire more yard space. We view that just buying Sime's Pasir Gudang (which totals 328 acres compared with MMHE's current 150 acres) alone would double its annual tonnage capacity from the current 69,700mtpa. Earnings accretion, should it be able to convert all of Sime's yard into useable space would be very significant.

As for price, the most recent fabrication yard transaction was between Ramunia Holdings Bhd and OilFab Sdn Bhd. The price paid for the yard was RM1.47 million per acre. Assuming a similar price is used to purchase Sime's Pasir Gudang yard, it would amount to RM482 million which MMHE can pay for with cash raised from its IPO (current net cash is RM1.7 billion).

We believe this transaction could materialise. The most synergistic to MMHE would be to acquire Sime's Pasir Gudang yard given the proximity to its yard.

With this M&A news coming into play and also the potential for MMHE to announce a new major contract in Turkmenistan (potentially more than RM4 billion), we view that MMHE, despite current expensive valuations, will hold up in the coming months and as such we stay put with our 'hold' call and raise valuations.

We raising our price-earnings ratio on the group to 25 times from 20 times. The rationale for the 25 times multiple is from mirroring Kencana Petroleum Bhd's peak of more than 25 times that was seen during the 2007 O&G run. With a 25 times PER pegging CY11 earnings per share our target price of RM5.80 is raised to RM7.25. We make no changes to estimates at this juncture.

We will be writing further at a later date on potential earnings accretion to MMHE. ' ECM Libra Research, April 25


This article appeared in The Edge Financial Daily, April 26, 2011.

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