The recent signing of the memorandum of understanding (MOU) between Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) and Sime Darby Engineering (Sime Darby) puts MMHE on an optimistic growth track.To recap, MMHE entered into a MOU with Sime Darby for the proposed acquisition of a 130 acres fabrication yard in Pasir Gudang, Johor at a provisional price of RM399 million to be satisfied entirely in cash.
On a separate note, Petronas also entered into an MOU with Sime Darby to acquire the 170 acres fabrication yard in Teluk Ramunia for a cash consideration of RM296 million.
According to the research arm of Kenanga Investment Bhd (Kenanga Research) the overall acquisition and its combined purchase price of RM695 million for both Pasir Gudang and Teluk Ramunia was fair. The overall 300 acres of yard space translated into an attractive price of RM2.3 million per acre.
OSK Research Sdn Bhd (OSK Research) in its research noted yesterday that the acquisition of these projects were well within expectations as Petronas had plans to consolidate the fabricators, be it their yards or their licences.
The research house expected this acquisition by MMHE to materialise as the company had strong orders but lacked sufficient yard space to perform its fabrication jobs due to its existing high utilisation rate of above 80 per cent.
In addition to that, the acquisitions were part of Petronas’s initiatives to encourage the local boys to grow bigger in order for them to compete in the international arena.
Kenanga Research noted that MMHE is currently in a strong net cash position of RM1.45 billion and thus, the purchase of new yard spaces would instantly boost its total annual tonnage capacity to 130,000 metric tonnes (mts).
The research house further added that more importantly, the newly added capacity presented instant enlarged capacity to take on higher tonnage projects from both domestic and regional. This could be done without having to wait for its yard optimisation programme to complete in 2014.
“We believe the strategic acquisition is timely as it prepares to take on two large domestic contracts which are the Tapis rejuvenation and Malikai deepwater platform,” the research firm said.As for Petronas’ acquisition of the Teluk Ramunia yard, OSK Research concluded that this acquisition was to provide additional resources to support ancillary infrastructure in line with its initiatives for the greater southern Johor development.
“In our view, having Teluk Ramunia would provide the company with additional land for its Pengerang project. In fact, we understand that the distance between the yard and project site is only about 20 kilometres,” OSK Research highlighted.
Although satisfactory due diligence was required before the acquisitions could go through, analysts at OSK Research did not see this process failing. Furthermore, analysts believed that these acquisitions could well had been part of the company’s plans in the earlier days since its existing utilisation rate had exceeded 80 per cent.
Therefore, the research house factored in some of MMHE’s new jobs into its financial year 2012 (FY12) forecast. These projects included a portion of the RM1.15 billion contract to construct the KBB Topsides for the Kebabangan Northern Hub Development Project, which was awarded to Sime Darby in April 2011.
Hence, OSK Research upgraded the FY12 earnings by 14 per cent. The research house pegged MMHE at a fair value of RM8.23 based on the existing price earnings ratio (PER) of 25 times FY12 earnings per share (EPS) following the FY12 earnings upgrade.
Kenanga Research on the other hand pegged MMHE at an upgraded target price of RM7.90 as analysts had rolled over its valuation to FY12 basis, based on an EPS of 31.6 sen and a PER of 25 times.