MALAYSIA Marine and Heavy Engineering Holdings Bhd (MMHE) saw a downgrade to a hold call by Affin Hwang Capital, with the research house noting it was time to lock in gains following a 32% share price appreciation over the past month. The target price remains at 45 sen.
“The stock was previously attractive as a trading opportunity given that its market capitalisation had fallen below its net cash value. This scenario has since reversed, although net cash still makes up 75% of its market cap,” said Affin Hwang analyst Tan Jianyuan.
However, the risk is also believed to be higher than the reward, considering the prolonged low oil price environment, which would delay the replenishment of new contracts. Still, Tan notes that the current order book of RM3 bil is likely to sustain MMHE for the next three to four years.
Petronas’ activity outlook had previously projected that the number of wellhead platform structures to be rolled out would increase from 5-9 units in 2019 to 10-13 units in 2020. The low oil price environment and a potential capital expenditure cut by Petronas will potentially see postponement of new contract wins, according to Tan, which would lead to lower order book replenishment.
Still, MMHE will likely be supported by earnings from its marine segment, despite a projected 7% drop in marine revenue in 2020.
“MMHE benefited from more dry docking activities in 2019 following an IMO2020 shipping regulation shift. Furthermore, two of Velesto’s rigs also underwent their five-year SPS exercise at MMHE’s yard. We project a 7% decline in marine revenue in 2020 as global demand weakens, before a return to an estimated 13% growth in 2021,” said Tan.
He adds that the new Dry Dock 3, which will increase MMHE’s current capacity by 68%, is targeted to be completed and commissioned by the third quarter of 2020, and would allow MMHE to cater to larger vessels.
Given the group’s net cash position of RM493 mil as of end-2019, projected positive cash flow, and RM3 bil order book, Tan believes MMHE is able to be self-sustaining over the next few years despite the likely slower rollout of contracts.
As of the noon close, MMHE’s shares were last done at 40.5 sen, down half a sen, with 521,500 shares traded. — April 22, 2020
