Malaysia Marine and Heavy Engineering Holdings Bhd (Jan 16, RM5.46)
Maintain underperform with target price RM4.82: Being in the Petroliam Nasional Bhd stable is no guarantee of Petronas contracts for MMHE, the country’s largest oil and gas (O&G) fabricator and yard owner. Project uncertainties, delays and intensifying competition cloud the company’s earnings visibility.
The stock is the most expensive in our O&G portfolio despite a three-year earnings per share compound annual growth rate (EPS CAGR) of -11.5%, a stark contrast to the sector average of 20.3%.
We begin coverage with an “underperform” call, valuing it at 17.6 times CY13 price-earnings ratio, a 40% premium over our target market PER.
MMHE’s order book is filling up more slowly than expected, indicating that it is not necessarily the fabricator of choice for Petronas, its production sharing contractors and even its parent MISC Bhd.
In an increasingly competitive operating environment, contract awards ultimately boil down to pricing, even for Petronas contracts. MMHE’s order book shrank from RM5.95 billion on June 10 to RM3.7 billion currently.
Two widely anticipated major contracts, Turkmenistan’s Block 1 Phase 2 project and Shell’s Malikai project, may not be awarded so soon and may not go to MMHE.
For Shell’s Malikai project, it does not help that MMHE is behind schedule in completing its Gumusut-Kakap floating production system.
Furthermore, we think that it is only a matter of time before the merged entity of Kencana Petroleum Bhd and SapuraCrest Petroleum Bhd matches MMHE’s fabrication capacity, especially given the delay in the acquisition of Sime Darby Bhd’s yard.
The expected fall in MMHE’s earnings bucks the broader sector’s uptrend. We think investors will prefer companies with more solid and long-term order books (Bumi Armada Bhd, Dialog Group Bhd, Kencana and SapCrest) and hold back from buying MMHE until there is a substantial improvement in its earnings prospects.
Bumi Armada, Dialog and Kencana boast 27% to 33% three-year EPS CAGR. — CIMB IB Research, Jan 16
This article appeared in The Edge Financial Daily, January 17, 2012.
Maintain underperform with target price RM4.82: Being in the Petroliam Nasional Bhd stable is no guarantee of Petronas contracts for MMHE, the country’s largest oil and gas (O&G) fabricator and yard owner. Project uncertainties, delays and intensifying competition cloud the company’s earnings visibility.
The stock is the most expensive in our O&G portfolio despite a three-year earnings per share compound annual growth rate (EPS CAGR) of -11.5%, a stark contrast to the sector average of 20.3%.
We begin coverage with an “underperform” call, valuing it at 17.6 times CY13 price-earnings ratio, a 40% premium over our target market PER.
MMHE’s order book is filling up more slowly than expected, indicating that it is not necessarily the fabricator of choice for Petronas, its production sharing contractors and even its parent MISC Bhd.
In an increasingly competitive operating environment, contract awards ultimately boil down to pricing, even for Petronas contracts. MMHE’s order book shrank from RM5.95 billion on June 10 to RM3.7 billion currently.
Two widely anticipated major contracts, Turkmenistan’s Block 1 Phase 2 project and Shell’s Malikai project, may not be awarded so soon and may not go to MMHE.
For Shell’s Malikai project, it does not help that MMHE is behind schedule in completing its Gumusut-Kakap floating production system.
Furthermore, we think that it is only a matter of time before the merged entity of Kencana Petroleum Bhd and SapuraCrest Petroleum Bhd matches MMHE’s fabrication capacity, especially given the delay in the acquisition of Sime Darby Bhd’s yard.
The expected fall in MMHE’s earnings bucks the broader sector’s uptrend. We think investors will prefer companies with more solid and long-term order books (Bumi Armada Bhd, Dialog Group Bhd, Kencana and SapCrest) and hold back from buying MMHE until there is a substantial improvement in its earnings prospects.
Bumi Armada, Dialog and Kencana boast 27% to 33% three-year EPS CAGR. — CIMB IB Research, Jan 16
This article appeared in The Edge Financial Daily, January 17, 2012.
