MMHE - Bags PETRONAS’ SK 316 EPCIC Contract

Reiterate contrarian BUY and MYR4.20 TP. MMHE has concurred on a multi-billion ringgit job win with the details to follow. The value and timing are within our expectations. Our earnings forecasts are unchanged, having incorporated MYR3b-3.5b job wins for 2013 of which MYR3b has been secured, including this contract. We expect more wins in the pipeline, extending into 2014 as PETRONAS re-ignites the much-delayed offshore fabrication awards. Our TP is pegged to 20x mid-2015 PER. This win should re-rate the stock higher.
Beat two bidders. According to an Upstreamonline article, a joint venture of Technip and MMHE has been confirmed as the winner of a PETRONAS tender for a lucrative multi platform development at Block SK 316 off Sarawak. The JV beat the McDermott-TH Heavy Engineering consortium and Saipem for the engineering, procurement, construction, installation and commissioning component for this project. Technip-MMHE’s bid was identified to be the most competitive with a local content contribution supporting the bid.
Multi-billion ringgit contract? There was no official announcement at press time to confirm this, but we understand that the contract value, pending finalisation, will be announced in due time. We reckon that MMHE’s 50% share in the JV will translate into works value of MYR1- 1.5b. Based on a 7-8% net margin, we estimate that MMHE should recognise net profit of MYR70m-MYR120m from this contract.
Positive, with more to come. We are positive on this win, which did not come entirely as a surprise for we have highlighted this possibility earlier. This new order will help reverse MMHE’s declining job replenishment rate since 4Q13. We expect further success rates as MMHE sees its MYR4.5b tender book (including SK 316, comprising 15 projects as at Jun 2013) turning into wins. Lundin’s Bertam wellhead project is also touted to go to MMHE. This momentum is set to sustain into 2014 as PETRONAS dishes out domestic fabrication works.
Maintain contrarian call and earnings expectations. Our forecasts are below the street’s, which are optimistic, in our view. However, we think the weak earnings in FY13-14 have been priced in and focus should be on FY15’s prospect and recovery in orders.