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Malaysia Marine and Heavy Engineering Berhad : Public Issue Of 262m New Shares - 12/10/2010

Malaysia Marine and Heavy Engineering Berhad : Public Issue Of 262m New Shares - 12/10/2010

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Published by Rhb Invest
Background. MMHE has been in the industry since 1973, when it was first registered as Malaysia Shipyard and Engineering (MSE). Since 2006 (prelisting), the company has been a wholly-owned subsidiary of MISC (which in turn is 65% owned by Petronas). It has two main divisions: 1) engineering and construction; and 2) marine conversion and marine repair segment.


Background. MMHE has been in the industry since 1973, when it was first registered as Malaysia Shipyard and Engineering (MSE). Since 2006 (prelisting), the company has been a wholly-owned subsidiary of MISC (which in turn is 65% owned by Petronas). It has two main divisions: 1) engineering and construction; and 2) marine conversion and marine repair segment.


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Published by: Rhb Invest on Oct 12, 2010
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03/01/2011

 
 
Table 1. Investment Statistics Bloomberg: MMHE MKNet EPSFYE Turnover Profit EPS Growth PER P/NTA P/CF ROE Gearing GDYMarch (RMm) (RMm) (sen) (%) (x) (x) (x) (%) (x) (%)2010
6,147.0 279.2 17.5 0.3 22.9 5.3 5.1 26.1 Net Cash -
2011f 
4,313.0 372.7 23.3 33.5 17.2 2.7 22.1 20.9Net Cash
 
-
2012f 
4,753.0 404.2 25.3 8.4 15.8 2.3 14.6 15.8Net Cash
 
-
2013f 
4,803.0 429.5 26.8 6.3 14.9 2.0 12.7 14.4Net Cash
 
-
Valuations based on estimated fair value of RM4.00/share
Issued capital (m shares)
1,600.0 (RM0.50 par)
Market capitalisation (RMm)
6,400.0
 
Background.
MMHE has been in the industry since 1973, when it was firstregistered as Malaysia Shipyard and Engineering (MSE). Since 2006 (pre-listing), the company has been a wholly-owned subsidiary of MISC (whichin turn is 65% owned by Petronas). It has two main divisions: 1)engineering and construction; and 2) marine conversion and marine repairsegment.
 
Industry outlook.
S
hallow-water development should remain strong inthe near term given Petronas’ focus on rejuvenating existing oilfields toenhance the extraction rates. However, in a longer term, oil and gasdevelopment will move to deeper waters. This is also beneficial for MMHE’sfloating systems business as fixed structure installations are generally noteconomical in water depths over 300m.
 
 
Investment case.
1) Order replenishment is assured given theshareholding links with Petronas and MISC; 2) Margins are on the uptrendas contracts move to “fixed-cost” structure; 3) Tie-up with global strategicpartners enhances technical know-how and opens up internationalopportunities; and 4) Turkmenistan yard will provide MMHE with exposureto Caspian Sea’s oil and gas projects.
 
Risks.
1) Significant dependence on Petronas means that the companyhas little control over its project flows; 2) Keen competition in all marketsegments could limit its ability to penetrate new markets; and 3) Cyclicalrisks of the crude oil price could lead to projects being shelved of delayed.
 
Forecasts.
We forecast MMHE’s net profit to be RM372.7m for FY11 andRM404.2m for FY12, based on growth mainly from its E&C operations.There is potential upside to earnings should contract flows accelerate inFY11.
 
 
Valuation.
We value MMHE at RM4.00/share based on 16x target PER of and our calendarised CY11 EPS forecast of 25sen. Our PER target for thestock is at a premium to the sector benchmark of 13x and to our targetPER for Kencana of 15x due to: 1) the Petronas link; 2) MMHE’S status asthe largest oil and gas fabricator among the seven licensed majorfabricators; and 3) MMHE’s strength as the leading fabricator fordeepwater production facilities. In our view, the stock will be the mostdirect play for Petronas’ offshore contracts going forward.
 
New Listing 
Malaysia Marine and HeavyEngineering
Public Issue Of 262m New Shares
Offer Price : RM3.80Fair Value : RM4.00
RHB ResearchInstitute Sdn Bhd
A member of theRHB Banking Group
Company No: 233327 -M
12 October 2010
 
Please read important disclosures at the end of this report.
 
LISTING DETAILSListing Sought
Bursa Malaysia MainBoard
Listing Date
29 Oct 2010
Public Issue
262 m new shares,including:- 184m tobumiputera investors- 78m to retail clients- 128-158.4m toTechnip
Offer For Sale
- 146.0 m to selectedinvestors
MAJOR SHAREHOLDERS(After IPO)
MISC ~64.6-66.5%Technip ~8.0-9.9%Public 25.5%
   M  a   l  a  s  i  a
   M   A   R   K   E   T   D   A   T   E   L   I   N   E
 
   P   P    7   7   6   7   /   0   9   /   2   0   1   1   (   0   2   8   7   3   0   )
 
Yap Huey Chiang(603) 92802239yap.huey.chiang@rhb.com.my
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
 
12 October 2010BUSINESS BACKGROUND
 
 
Long track record.
MMHE has been in the industry since 1973, when it was first registered as MalaysiaShipyard and Engineering Sdn Bhd (MSE). Then, shareholders included Malaysia Government (51%), Sumitomo(24.5%), Kuok Brothers (12.25%) and International Maritime Carriers (12.25%). Since 2006 (pre-listing), thecompany has been a wholly-owned subsidiary of MISC (65% owned by Petronas). Its core businesses areengineering and construction, marine conversion and marine repair, but these activities are segregated into twomain divisions: 1) engineering and construction; and 2) marine conversion and marine repair segment. Itsoperates two fabrication yards it in Pasir Gudang (Johor) and Kiyanly (Turkmenistan).
Figure 1 : Corporate Structure Pre-Listing
* Under Members Voluntary LiquidationSource: MMHE Prospectus
 
Engineering & construction (E&C) division is main earnings driver.
The division offers a full range of construction and engineering services, from detailed engineering design, procurement, installation, hook-upand commissioning focused on the fabrication of jackets, production and process modules, integrated decks,living quarters and various other structures for the oil & gas and petrochemical industries. It has accounted for58-91% of revenue and 52-75% of operating profits for FY08-10, and rides on MMHE’S status as one of sevenPETRONAS licensed fabricators eligible to bid for engineering and construction contracts for Malaysia. It alsooperates the Kiyanly yard in Turkmenistan on behalf of Petronas Carigali Turkeministan S/B (a subsidiary of Petronas). At this juncture, the division still accounts for most of the company’s order book (RM5.9bn) andtender book (RM9bn).
 
Table 2 : Historical Breakdown Of Revenue And Operating ProfitsFYE March (RMm) FY08 FY09FY10
Engineering & Construction 1,014.9 3,042.05,603.8Marine Conversion and Repair 718.5 960.4540.0Others 8.5 18.73.2
Revenue 1,741.9 4,021.16,147.0
Engineering & Construction 123.9 207.7285.9Marine Conversion and Repair 153.4 215.699.9Others (43.8) (78.7)(7.5)Adjustments 3.8 4.72.3
Operating Profit 237.4 349.5380.7Margin (%)
Engineering & Construction 12.2 6.8 5.1Marine Conversion and Repair 21.4 22.5 18.5Operating Profit 13.6 8.7 6.2
Source: MMHE Prospectus
 
MISCMHB(100%)MTSB(100%)MMHE(100%)MSECorporation *S/B (100%)TechnoIndah S/B(100%)MSLNG(70%)MMHE-ATB(40%)MMHE-TPGM(60%)
MMHE 2
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 
 
12 October 2010
 
Marine conversion and repair division expected to grow with yard optimisation exercise.
This divisionfocuses on: 1) the conversion of vessels such as VLCCs and Aframax tankers to Floating Production Storageand Offloading (FPSOs) and Floating Storage Offloading (FSOs); and 2) the repair, refit and refurbishmentservices for a wide range of energy vessels which it markets via its JV with Samsung Heavy Industries. Servicesare performed only in the Pasir Gudang yard where the drydock facility for marine conversion is one of thelargest in the Southeast Asia region in terms of tonnage. There are plans to lift the contribution of this divisionby increasing the yard capacity. Currently, the E&C division takes up most of the capacity, thus limiting thespace available for marine conversion and repair division.
 
Table 3: Snapshot Of Pasir Gudang And Kiyanly YardsPasir Gudang Kiyanly
Operated and owned by MMHE Operated by MMHE TPGM Turkeminisatn on behalf of PetronasCarigali (Turkmenistan) S/b150.6 hectare complex with 1.8km seafront43.6 hectare complex5 open fabrication areas covering 321,400 m2Ability to fabricate up to 25,000 MT p.a.35 fully covered workshops totaling 99,000 m22 dry-docks accommodating vessels up to 450,000 dwt and liftships/structures up to 50,000dwtAbility to construct large marine structures with a total tonnageof 69,700 MT p.a.Capable of undertaking any single structure up to 40,000MT
Source: MMHE Prospectus
INDUSTRY OUTLOOK
 
Only seven licensed offshore fabricators in Malaysia.
There are only seven fabricators with a licence tofabricate offshore oil and gas structures; MMHE, Sime Darby, Kencana, Boustead Heavy Industries, BrookeDockyard, Ramunia and Oilfab. MMHE tops both in terms of annual tonnage capacity and market share, whileSime Darby comes in second, unsurprising given both are backed by large holding companies (Petronas andSime Darby). Going forward, Kencana also plans to gain deepwater experience and has already upgraded itsyard space to accommodate larger and higher-end structures.
Table 4: Malaysian Fabrication Yards
 
ShiyardCompanyAnnual TonnageCapacityMarketShare (%annualtonnagecapacity)FabricationArea (m2)MaximumSkid TrackTonnageDeepwaterExperience
MMHE , Pasir GudangMMHE 69,700 27.30 321,400 40,000 YesSime Darby , Pasir GudangSime Darby 60,000 23.50 NA 15,000 NoKencana, LumutKencana HL 48,000 18.8 560,500 20,000 NoBoustead, PenangBoustead 9,000 3.5Up to 3 setsof topsides/ jackets4,000 NoBrooke, Sejingkat BrookeDockyards8,500 3.3 63,500 4,000 NoSime Darby, Teluk RamuniaFabrication Yard ASime Darby 10,000 3.9 124,064 6,000 NoSime Darby, Teluk RamuniaFabrication Yard BSime Darby 30,000 11.8 292,010 11,000 NoSime Darby, Teluk RamuniaFabrication Yard BSime Darby 20,000 7.8 155,312 10,000 No
Source: MMHE Prospectus, ODS-Petrodata
 
 
Focus on shallow-water developments in the near term.
There is still much interest in the older shallow-water developments as Petronas looks to sustain the nation’s production and to make sure that it does not missout on any untapped reserves. Its importance was evident when the need to continue developing existing fieldswas mentioned and highlighted in the Economic Transformation Programme (ETP) open day as part of the “Sustain” step for the oil and gas sector. Notable projects up for grabs in the near term include: 1) Topsidemaintenance projects worth RM1.7bn; and 2) ExxonMobil commitment of US$2.1bn to develop Tapis and sixother oil and gas fields, namely, Seligi, Guntong, Semangkok, Irong Barat, Tabu and Palas.
 
Malaysian oil and gas developments going deeper.
According to ODS-Petrodata, Malaysia has focused ondeepwater fields since 2002 as the shallow water fields are becoming mature. At present there are sevendeepwater fields that are currently being developed or will enter the development phase over the next threeyears. The Kikeh field has been on-stream since 2007, while the Gumusut-Kakap field is widely believed to benext, given that fabrication on the semi-submersible which would be used for it has just begun.
MMHE 3
A comprehensive range of market research reports by award-winning economists and analysts are exclusivelyavailable for download from
w w w .rhbinvest.com 
 

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