Malaysian Marine & Heavy Eng - Completed Sime yard acquisition BUY

Stock Name: MHB
Company Name: MALAYSIA MARINE AND HEAVY ENG

Research House: AMMB

Price Call: BUY

Target Price: 6.50

- We reiterate our BUY on Malaysia Marine & Heavy EngineeringHoldings (MMHE), with an unchanged fair value of RM6.50/share, based on anFY12F PE of 22x ' at parity to Kencana Petroleum's peak in 2007.

- MMHE announced the completion of its acquisition of SimeDarby's 130-acre fabrication yard in Pasir Gudang on 31 March this year for afinal price of RM393mil, just slightly lower than the earlier indicative priceof RM399mil back in May 2011. 

- As expected and indicated in our earlier reports, the groupalso announced that it has novated the RM1.2bil Kebabangan topside fabricationcontract for the Kebabangan Petroleum Operating Company (KPOC) from Sime Darby.Recall that this project is scheduled for completion in September 2013.

- We understand that the details such as contractual terms andconditions of the Kebabangan contract are still being negotiated with KPOC. Butthe project is expected to generate a comfortable profit margin, which shouldmean that the novation should be earnings accretive.

- Assuming a pre-tax margin of 8% for the Kebabangan job andloss of interest income from the cash acquisition of the yard, we estimate thatthis acquisition and novation should contribute RM16mil or 3% to FY12F netprofit.

- The novation of the Kebabangan contract will raise MMHE'sorder book by 30% from RM3.1bil to RM4bil. While MMHE's current yard iscurrently almost fully utilised, its order book expansion is still poised toaccelerate with the 35% expansion of yard capacity from the Sime yard acquisition,coupled with the upcoming completion of the Kinabalu gas processing platformand recent 'superlift' milestone of the Gumusut-Kakap floating production storage(PFS) semi-submersible. 

- Additionally, we expect strong newsflow from Petronas/ TurkmenistanPhase 2 development following the recent re-election of Turkmenistan'sincumbent president.  We understand thatthe group is currently bidding for fresh projects worth RM5bil, of which atleast half stems from Petronas.

- Hence, we expect the Sime yard acquisition to catalyse there-rating in MMHE. Other catalysts are the expected upsurge in new ordermomentum and margin improvement with the Gumusut-Kakap FPS project reaching the25% completion threshold amid the operational revamp under the new groupmanaging director. The stock currently trades at an attractive FY12F PE of 19x,below Kencana Petroleum's peak of 22x.  

Source: AmeSecurities