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(RM m) (RM Oct-19
▲
Nov-19
Dec-19
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47 Jan-20 Target Price Target Share Price
Research
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Equity Oil & Gas Company Update
Equity Oil and Gas
Oil & Gas BIMB Securities Research Company update : MMHE
MBU to drive earnings FY21F onwards MMHE’s marine business unit (MBU) segment which undertakes marine repair and FPSO conversion projects has consistently been making profits over FY13-17. Recall that 2018 is an exceptionally weak year as it fell into losses due to cost provision made for an FPSO conversion project (Chart 1). Recovery was then hampered in subsequent years by the delay in LNG drydocking works due to uncertainties with regards to the implementation of IMO2020 clean fuel rule.
Chart 1: MBU segment result
RM m % 600 40 495 464 500 445 431 30 365 400 323 285 289 20 300 253 10 200 106 84 99 75 0 100 41 23 17 40 0 -10 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20F FY21F -100 -20 -62 Revenue EBITDA EBITDA margin Source: Rystad Energy, BIMB Securities
The recurring income from MBU segment provides MMHE with a cushion against the cyclicality of Heavy Engineering Unit (HEU) segment which relies heavily on oil and gas development projects. This leads to the expansion of MBU segment via the construction of new Dry Dock 3 (DD3) which costs c.RM520m. As at 2Q20, the construction of DD3 reached 94% completion. After slight delay in construction works due to restrained movement order amidst the Covid-19 pandemic, DD3 is poised for commercial operation beginning 1Q20. We expect MMHE to secure more work orders moving forward, especially from third-party clients as DD3 will help to reduce bottlenecks at existing drydocks. Currently, DD1 is reserved for MISC drydocking activities hence this virtually leaves DD2 as the sole dry dock for third party jobs. As such, we expect DD3 to provide structural earnings growth to its recurring income from FY21F onwards. We expect this, coupled with normalisation of the drydocking activities following the IMO2020 rule which already came into effect, to underpin MBU as the main driver of MMHE’s earnings moving forward. The roll-out of ‘Design One, Build Many’ to kickstart local projects We think Petronas may sanction low-cost development projects in near-term via the roll-out of ’Design One, Build Many’ (D1BM) initiatives. D1BM is an integrated approach on design standardisation and volume consolidation which targets to reduce the overall development costs, thereby making marginal fields development viable in a low oil price environment. Upstream, an oil and gas news magazine, in May 2020 reported that Petronas has awarded Aker Solutions a contract to provide front-end engineering and design (FEED) service for D1BM initiatives while the tender for construction jobs may be out for bidding in 4Q20. The tender will involve the construction of 20 minimum facility platforms that are required for marginal field development within next 4-5 years. To recap, based on Petronas Activity Outlook 2020-2022, Petronas expects to build 16-29 lightweight wellhead platform (WHP) weighing less than 1,000 tonnes over 2020-2022. A WHP is typically used to house wellheads and equipment and serve as a conduit for a jack- up drilling rig to perform its production drilling activities. We estimate the total contract value for 20 WHPs under D1BM project to be worth at least c.RM1bn based on average cost of RM50m per unit. For comparison, 2 lightweight WHPs (BEDP-A and BEDP-B) and linking bridge that are under construction for Bekok field are worth c.RM150m. PP16795/03/2013(031743) | Page 2
BIMB Securities Research Company update : MMHE
Focus remains on projects abroad While there is scarcity in local projects, MMHE continues its effort to reduce its dependency on Petronas’ jobs by pursuing foreign projects. Assuming MMHE can maintain its EBITDA margin of 4-5%, we estimate that it needs a minimum annual revenue of RM1.2-1.5bn to achieve breakeven in HEU segment. Currently, it has a huge chunk of its tenderbook coming from foreign projects. We estimate that bids for foreign projects currently stand at RM10bn, representing 80% of its tenderbook (Chart 2). It is mainly comprised of Saudi Aramco’s contract release purchase order (CRPO) tender bids for projects offshore Saudi as well as offshore windfarm projects in Taiwan. We also expect MMHE to participate in Shell’s Crux gas field development project as a subcontractor to TechnipFMC.
Chart 3: Breakdown of MMHE tenderbook (RM bn)
2.5
10.0
Local projects Foreign projects
Source: Rystad Energy, BIMB Securities
To re-cap, MMHE has signed with Aramco for a 6+6 years long-term offshore agreement which covers the engineering, procurement, fabrication, transportation and installation (EPCI) of offshore facilities offshore Saudi. Amidst oil market turmoil, Aramco is seen to focus on brownfield and offshore maintenance while delay its large-scale capacity expansion and greenfield developments such as for Zuluf, Marjan and Berry fields. Initially the expansion projects are touted to be worth c.USD18bn which could add incremental production of c.1.2m bpd (Marjan: 300,000 bpd, Berri: 250,000 bpd, Zuluf: 600,000 bpd). According to Upstream, Aramco has been spending between USD1.5-2bn per year of offshore maintenance projects as part of LTA agreement.
PP16795/03/2013(031743) | Page 3
BIMB Securities Research Company update : MMHE
Values re-emerging, BUY Despite poor sentiment over the stock due to low oil price, we opine that the company’s fundamental remains solid with the upcoming DD3 to further enhance its earnings prospect and financial position. We remain in favor of the stock due to (i) its earnings growth from expansion of marine repair business; (ii) its market leadership in the local offshore development project backed by Petronas’ stewardship; (iii) strong orderbook of RM2.6bn supported by tenderbook worth RM12.5bn; and (iv) strong balance sheet with net cash position of RM432m or RM0.27/share (as at June 2020). We upgrade MMHE to BUY (from HOLD) with unchanged SOP-derived TP of RM0.42. This implies 0.3x FY21F P/B. We think the potential earnings from DD3 in near future and its diversification away from oil projects have been largely overlooked. We think this will be a key driver to higher earnings – as well as to its share price. Our TP breakdown is elaborated further below:
Table 1: TP derivation breakdown Items RM m per share (RM) Remarks Heavy engineering unit (HEU) - Ascribe zero value to HEU Marine business unit (MBU) 187.5 0.12 Based on 10x PE on average FY21-23F EPS Enterprise value 187.5 0.12
Add: (Net debt)/cash 493.0 0.31 As at audited account FY19 Total equity value 680.5 0.425 No. of shares (m) 1,600.0 Equity value per share (RM) 0.425 Implies FY21F P/B of 0.3x Source: BIMB Securities
Key risks Project delay and cancellation. Some projects may face delay or at risk of cancellation should oil price continues to decline further and remains depressed for a sustained period. This could affect our forecast as we have imputed orderbook replenishment assumption of RM600m/RM1bn in FY21F/FY22F. Thin margin in fabrication business. Weaker-than-expected margin could drag MMHE into losses for a longer duration. Cost overruns. MMHE has on several occasions incurred cost disputes with its clients during construction and conversion works. However, the bulk of jobs expected would be from Petronas/MISC which it has had good working relations. Key catalysts Maiden job from modular fabrication projects. We believe maiden job from Aramco could boost its fabrication yard utilisation rate and provide key re-rating to its stock price. Successful venture into fabrication of wind farm structures. Successful foray into this would reduce MMHE’s dependency on offshore O&G development which could be challenging in the medium term amidst uncertainty in crude oil prices. We also note that the RE industry offers huge growth potential over the longer term.
PP16795/03/2013(031743) | Page 4
BIMB Securities Research Company update : MMHE
APPENDIX Background of the company - Malaysia’s largest offshore fabricator Malaysia Marine Heavy and Engineering Bhd (MMHE) is Malaysia’s largest offshore fabricator equipped with one of the largest dry-dock facility in Southeast Asia (SEA), located in Pasir Gudang, Johor. It has two business segments:
Heavy engineering unit (HEU) which fabricates offshore structures such as CPP, WHP etc. to the extent of full scope basis (ie. EPCC). Currently, it has two fabrication yards located in Pasir Gudang, Johor namely ‘MMHE West’ and ‘MMHE East’ with combined annual fabrication capacity of 129,700 metric tonne (MT). Marine business unit (MBU) which carries out conversion projects (such as FPSO, FSO) and marine repairs including dry-docking services to LNG vessels, rigs etc. It has three dry-docking facilities namely Dry Dock 1, Dry Dock 2 and Floating Dock (in Kemaman) with aggregate capacity to handle vessels of up to 600,000dwt.
MMHE has vast experience in delivering offshore construction and vessel conversion projects. Currently, it is the only yard in Malaysia that has experience in constructing deepwater structures as well as completing the marine conversion projects (such as FPSO and FSO). Key projects delivered are as per Table 2:
Table 2: MMHE’s notable offshore projects Heavy engineering projects Weight (MT) Clients Year Remarks
Kikeh Truss Spar 15,908 Murphy Sabah 2006 Asia’s first deepwater Truss spar Gumusut Kakap Semi-submersible Floating production System (FPS) 39,000 Sabah Shell 2013 Asia’s largest deepwater structure Tapis Enhanced Oil Recovery (EOR) projects 20,869 ExxonMobil 2014 SEA’s first large scale EOR project SK316 projects 33,895 Petronas Carigali 2015 Malikai Tension Leg Platform (TLP) 27,500 Sabah Shell 2016 Malaysia’s first deepwater TLP project Bokor Phase 3 Redevelopment CPP 15,000 Petronas Carigali Ongoing Kasawari Gas Development 53,600 Petronas Ongoing
Marine conversion projects
Conversion of FPSO Kikeh MISC 2007 Malaysia’s first Deepwater FPSO Rejuvenation, Life Extension and Conversion of LNG to FSU Tenaga Satu MISC 2012 Conversion of FPSO Cendor MISC 2014 Conversion of FSO Benchamas 2 MISC 2018 Conversion of FSO Bergading EA Technique 2018 Source: Company, BIMB Securities
PP16795/03/2013(031743) | Page 5
BIMB Securities Research Company update : MMHE
Income Statement FYE 31 Dec (RM m) 2018 2019 2020F 2021F 2022F Turnover 974.4 1,009.5 1,248.3 1,795.0 2,120.0 Net opex (1,021.0) (985.4) (1,192.6) (1,703.4) (2,008.8) EBITDA (46.6) 24.1 55.7 91.6 111.2 Depreciation & amortisation (84.8) (83.1) (93.7) (93.8) (89.5) EBIT (131.4) (59.0) (38.0) (2.2) 21.7 Interest income 15.3 17.9 15.4 18.5 17.8 Interest expense 0.9 - - - - Associates & JVs 3.0 1.3 (3.0) (3.0) (3.0) Exceptional Items (11.9) - - - - Pretax profit (124.1) (39.8) (25.6) 13.3 36.5 Core PBT (112.2) (39.8) (25.6) 13.3 36.5 Tax expense (0.1) 5.5 - - - Minority interest 1.5 - - - - Core PATAMI (110.8) (34.2) (25.6) 13.3 36.5
Balance Sheet FYE 31 Dec (RM m) 2018 2019 2020F 2021F 2022F Non-Current Asset 1,905.5 2,034.9 2,113.1 2,016.4 1,923.9 Current Asset 1,275.7 1,183.1 1,756.5 2,445.8 2,919.1 Total Asset 3,181.2 3,218.0 3,869.6 4,462.2 4,843.0
Non-Current Liabilities 48.4 187.5 187.5 187.5 187.5 Current Liabilities 726.0 649.1 1,326.3 1,905.5 2,249.9 Total Liabilities 774.4 836.5 1,513.8 2,093.0 2,437.4 Total Equity 2,406.8 2,381.4 2,355.8 2,369.1 2,405.6 Total liabilities & equity 3,181.2 3,218.0 3,869.6 4,462.1 4,843.0
Cash Flow FYE 31 Dec (RM m) 2018 2019 2020F 2021F 2022F Cash flow from operating activities (CFO) 62.8 123.2 (15.7) 120.4 128.3 Cash flow from investing activities (CFI) (136.6) (174.8) (159.6) 18.5 17.8 Cash flow from financing activities (CFF) (11.8) 124.0 - - - Net change in cash & cash equivalent (85.7) 72.4 (175.3) 138.8 146.1 Source: Company, BIMB Securities
PP16795/03/2013(031743) | Page 6
BIMB Securities Research Company update : MMHE
DEFINITION OF RATINGS BIMB Securities uses the following rating system:
STOCK RECOMMENDATION BUY Total return (price appreciation plus dividend yield) is expected to exceed 10% in the next 12 months. TRADING BUY Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain. HOLD Share price may fall within the range of +/- 10% over the next 12 months TAKE PROFIT Target price has been attained. Fundamentals remain intact. Look to accumulate at lower levels. TRADING SELL Share price may fall by more than 15% in the next 3 months. SELL Share price may fall by more than 10% over the next 12 months. NOT RATED Stock is not within regular research coverage.
SECTOR RECOMMENDATION OVERWEIGHT The Industry as defined by the analyst’s coverage universe, is expected to outperform the relevant primary market index over the next 12 months NEUTRAL The Industry as defined by the analyst’s coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months UNDERWEIGHT The Industry as defined by the analyst’s coverage universe, is expected to underperform the relevant primary market index over the next 12 months
Applicability of ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
Disclaimer This report has been prepared for information and educational purposes only and are not recommendation or endorsement to sell or solicitation to buy any securities, subscription of financial products or otherwise to be taken as investment advice of any form or kind and neither should be relied upon as such. The information herein was obtained or derived from publicly available information, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that all information and data are accurate and the opinions are fair and reasonable, we do not represent or warrant their accuracy, timeliness, completeness and currentness or applicability of such information for any particular purpose. The investments advice or idea discussed or recommended in this report may not be suitable for all investors. Any recommendation presented in this report is general in nature and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this report. The investors are advised to conduct own research and seek independent professional advice prior to taking any investment or investment related decisions. The directors and employees of BIMB Securities Sdn Bhd and BIMB Group of Company may from time to time have a position in or either the securities mentioned or may provide services to any company and affiliates of such companies whose securities are mentioned herein. BIMB Securities Sdn Bhd and BIMB Group of Company accept no liability for any direct, indirect or consequential losses, claims and damages arising from any use of this report.
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BIMB SECURITIES SB (290163-X) A Participating Organisation of Bursa Malaysia Securities Berhad Level 32, Menara Multi Purpose, Capital Square, No. 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur Tel: 03-2613 1600 Fax: 03-2613 1799 Azharuddin Nordin http://www.bimbsec.com.my Head of Research
PP16795/03/2013(031743) | Page 7