Malaysia Marine & Heavy Engineering : EPIC JV to service OSVs HOLD

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Malaysia Marine & Heavy Engineering : EPIC JV to service OSVs HOLD

We maintain our HOLD recommendation on Malaysia Marine and Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM1.00 based on a 40% discount to book value.

MMHE has subscribed to a 70% stake for RM7mil cash to enter into a JV with EPIC to undertake repair services of offshore support vessels (OSV) which include dry docking repairs, refits, refurbishments, maintenance and technical solutions at EPIC’s ship repair facilities in Kemaman, Terengganu.EPIC, formerly listed, is a wholly-owned Terengganu state government linked corporation which owns and manages the 240-hectare (75% developed) Kemaman Supply Base. While the EPIC JV so far has no firm order book, we understand that this venture aims to service OSVs while MMHE’s Pasir Gudang drydocks will mainly cater to larger vessels such as very large crude carriers, liquefied natural gas carriers, containers, chemical/oil/product tankers.Even though ship repairs enjoy high margins, we are neutral on this development as MMHE’s main order book and revenue prospects stem from upstream oil & gas exploration and development activities, partly supported by downstream sub-contractor jobs from RAPID in Pengerang, Johor.

In 2QFY16, MMHE’s new order intake fell 79% QoQ and 57% YoY to RM156mil, mostly from RAPID. There is a strong likelihood that the group’s overall order book trajectory may continue to be flat as RAPID’s major refinery contracts have already been awarded. However, we understand that the major RAPID packages yet to be awarded are for the petrochemical projects. Hence, we expect MMHE, as the country’s leading yard which has secured 6 RAPID sub-contracts to date, to secure some of these works and it may be partly cushioned from global project deferrals and cost cut-backs. The stock current trades at a high FY17F PE of 27x, well above its 2-year average of 16x. We caution that there may be further asset impairments towards the year-end if crude oil prices remain depressed.

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