THHEAVY (7206) : TH Heavy Engineering - When the going gets tough
Target RM1.48 (Stock Rating: ADD)
In an interview with The Edge, THHE's CEO Nor Badli Alias, who is also the president of Malaysian Offshore Contractors Association (MOCA), said the domestic fabrication industry has lost large central processing platform (CPP) contracts to foreign companies. However, there is less of an impact on THHE as the company has forayed into the FPSO business. We value the stock at a CY16 P/E of 14.8x, still at a 30% discount to the P/E of the oil & gas big caps. A successful FPSO venture is the potential re-rating catalyst. THHE remains an Add and our top pick among the oil & gas small caps.
What Happened
The Edge newspaper featured an interview with Badli, who lamented on the awards of large CPP contracts to foreign companies, a move that has adversely affected local fabricators. Badli said that the operating environment in the fabrication segment has been increasingly difficult, resulting in THHE's fabrication order book shrinking to RM300m currently, from RM400m in Jul 2014, following the completion of topsides for Murphy's Permas field in Aug. The company did not make the cut for earlier CPP contracts, such as the US$1bn Bergading job that was awarded to Hyundai Heavy Industries in May 2014. See overleaf for more highlights from the interview.
What We Think
We note that THHE's frustration is shared by several industry peers. In addition to heading THHE, Badli is also the president of MOCA, a position he has held since Jun 2012. MOCA has seven full members, namely THHE, MMHE, SapuraKencana HL, Labuan Shipyard, Boustead, Brooke and Shapadu, and more than 20 associate members. MMHE is facing the same issue, although its situation is more serious as it has no other businesses. In contrast, THHE also has a presence in the floating, production, storage and offloading (FPSO) business. THHE has under its belt an 8-year US$372m FPSO contract awarded by Nippon Oil for work at Sarawak's Layang field in May 2014. The contract comes with a 10-year extension option. The fabrication of FPSO modules will start in 1Q15, thus mitigating the weakness in the fabrication business, before contributions from the operations of the FPSO vessel start flowing in mid-FY16.
What You Should Do
Accumulate the stock, which offers a cheap exposure to the FPSO business that offers the company long-term earnings visibility, thanks to the 8+10 contract.
Source: CIMB Daybreak - 10 November 2014
Target RM1.48 (Stock Rating: ADD)
In an interview with The Edge, THHE's CEO Nor Badli Alias, who is also the president of Malaysian Offshore Contractors Association (MOCA), said the domestic fabrication industry has lost large central processing platform (CPP) contracts to foreign companies. However, there is less of an impact on THHE as the company has forayed into the FPSO business. We value the stock at a CY16 P/E of 14.8x, still at a 30% discount to the P/E of the oil & gas big caps. A successful FPSO venture is the potential re-rating catalyst. THHE remains an Add and our top pick among the oil & gas small caps.
What Happened
The Edge newspaper featured an interview with Badli, who lamented on the awards of large CPP contracts to foreign companies, a move that has adversely affected local fabricators. Badli said that the operating environment in the fabrication segment has been increasingly difficult, resulting in THHE's fabrication order book shrinking to RM300m currently, from RM400m in Jul 2014, following the completion of topsides for Murphy's Permas field in Aug. The company did not make the cut for earlier CPP contracts, such as the US$1bn Bergading job that was awarded to Hyundai Heavy Industries in May 2014. See overleaf for more highlights from the interview.
What We Think
We note that THHE's frustration is shared by several industry peers. In addition to heading THHE, Badli is also the president of MOCA, a position he has held since Jun 2012. MOCA has seven full members, namely THHE, MMHE, SapuraKencana HL, Labuan Shipyard, Boustead, Brooke and Shapadu, and more than 20 associate members. MMHE is facing the same issue, although its situation is more serious as it has no other businesses. In contrast, THHE also has a presence in the floating, production, storage and offloading (FPSO) business. THHE has under its belt an 8-year US$372m FPSO contract awarded by Nippon Oil for work at Sarawak's Layang field in May 2014. The contract comes with a 10-year extension option. The fabrication of FPSO modules will start in 1Q15, thus mitigating the weakness in the fabrication business, before contributions from the operations of the FPSO vessel start flowing in mid-FY16.
What You Should Do
Accumulate the stock, which offers a cheap exposure to the FPSO business that offers the company long-term earnings visibility, thanks to the 8+10 contract.
Source: CIMB Daybreak - 10 November 2014
