tasecurities company update - i3investor2015 source: ta research, various immediate catalyst from...

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

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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

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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%.


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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.


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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.


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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)


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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.


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APPENDIX: Ongoing Projects from Recent (Oct 2013) Yard Visit

Figure 7: FPSO Cendor

Figure 8: Tapis EOR


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Figure 9: Malikai TLP


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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

tasecurities company update - i3investor2015 source: ta research, various immediate catalyst from...

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