The company, which has emerged from the financial predicaments following the APH issue after making over RM400mil provision over the past few years, is all geared up to ride on the oil and gas boom as well as Petroliam Nasional Bhd’s (Petronas) massive capital expenditure.
MEB, which was once a darling among its peers, has seen its share prices recovering and is currently at its highest in about five year, trading at about 10 times 2014 price earnings (PE). The stock has risen some 25% year-to-date indicating that the group’s turnaround prospects are intact in 2014.
Analysts say the MEB turnaround story is compelling and by any indication, the company’s share price has been on an uptrend. They add that MEB still offers one of the most attractive turnaround prospects and there is a further re-rating potential arising from Petronas’ capex spending. According to data compiled byBloomberg, five analysts have a “buy” call on MEB while one has a “sell” call.
Analysts say that on top of its recurring income, MEB’s job flow prospects from the crane will still be good in 2014, providing positive earnings prospects in the current financial year ending Dec 31, 2014 (FY14). CIMB says MEB’s major onshore fabrication licence awarded by Petronas in 2013 has also raised the group’s profile, putting it on par with other local oil and gas players.
RHB Research believes the investment community still harbours a negative perception on the group’s earnings capability, mainly due to the failed APH project. It added that the APH should no longer pose an issue on MEB’s earnings going forward.Chief financial officer Shirleen Lee tells StarBizWeek that no further provision would be made in relation to the APH. “All fully provided for over 2010 to 2012, about RM400mil,” she says.Asked if MEB will revive or restructure the APH project, Lee says: “We would not make any comment at this moment as it involves the bank (CIMB Group) and the Government.
”APH was to be one the largest fully integrated terminals, with multiple jetties capable of accommodating over 3,000 vessels annually, handling over 30 million tonnes of petroleum products. The initial estimated cost of the project was RM1.7bil and it was scheduled for completion in 2009.CIMB Group, which was the project financier, reportedly stopped the line of credit to APH when the project was saddled with delays and cost overruns, delaying the latter’s payment for construction works done by MEB. CIMB subsequently put APH under receivership.
MEB was awarded an RM820mil contract for marine piling and jetty works of APH’s oil storage and bunkering facility on a reclaimed island off Tanjung Bin, Johor. It has been reported that Muhibbah had completed RM630mil worth of works and had yet to receive payment for RM371mil.RHB says there were a few interested international parties that were keen on reviving the APH but nothing has progressed to date. It cautiously assumes that there will not be any amount recoverable in the future.
Armed with an order book of RM1.83bil, Lee says MEB’s growth will be underpinned by the global oil and gas sector as well as Petronas’ massive investment plan over the next five years.“Of the RM1.83bil, about RM700mil are from construction, RM1.064bil from crane and RM47mil from shipyard division,” she adds.Lee stresses MEB also has recurring increasing revenue from its airports operations in Cambodia as well as road maintenance concessions in Malaysia.
“With our proven track records in the global oil and gas industry, we are optimistic to secure some contracts from the Refinery and Petrochemical Integrated Development (Rapid) project (The total estimated value for Rapid is RM89bil over next few years). Indeed, there are only a handful of qualified local contractors for Rapid,” Lee claims.
RHB says the total orderbook for the infrastructure segment of about RM700mil would with earnings visibility up to FY16. It says around 9% of the orderbook came from the oil and gas-related industry and the remaining 91% from other sectors such as mining, airports, and onshore construction.The research house says while replenishment of the orderbook has been relatively weak over the past three years, but this is set to change as the infrastructure construction segment transforms into a purer oil and gas division.
Lee says MEB, which has allocated RM20mil for capital expenditure in FY14, still have several major outstanding contracts such as the Australia Wiggins Island Coal Export Terminal (expected to end by 2014), Noise barriers and enclosures for MRT (expected to end by 2016) and Cambodia airports building and refurbishment (expected to end by 2015). Most of the projects are expected to end by 2014 and 2015.
Commenting on the outlook for its subsidiary, Favelle Favco Bhd, Lee says the demand is expected to be sustainable and strong especially from the offshore crane for the next two to three years driven by the offshore oil and gas activities. She adds that there is huge crane replacement demand for old rigs as well as new deep water rigs from global market.
The crane manufacturing division’s orderbook is currently at its record high of RMR1.1bil, of which 95% is made up of offshore cranes.On average, RHB says Favelle Favco contributes 25% of MEB’s group revenue and 33% of group pre-tax profit. It points out that this crane division’s profit took a plunge in FY10 due to the global slowdown in the oil and gas sector. Revenue picked up in FY10 after a surge in oil prices encouraged more exploration and production (E&P) activities.
The research house expects Favelle Favco’s pre-tax profit margin to stay resilient at 10% due to its ongoing cost saving initiatives and healthy demand for drilling rigs. Servicing and leasing of cranes, which contributes approximately 15% of Favelle Favco’s earnings, yields greater margin compared to manufacturing cranesAnalysts points out that MEB, which awarded a license by Petronas would opens the door for MEB to directly bid for Petronas’ projects without having to be sub-contracted or being part of a consortium. In addition, it would catapult the group into the league of first-tier players/licencees. The offshore licence could boost MEB’s profile and make it a likely beneficiary of Petronas’s RM60bil capital expenditure per annum.
Analysts says MEB’s airport operations are sometimes overlook. In fact, MEB’s Cambodian airport concession is a solid cashcow to the group. In 2013, the Cambodian airport registered record airport passenger arrivals of over five million, translating into a 3-year compounded annual growth rate of 16% from 2010-2013.
HwangDBS Vickers Research estimates the airport concession will contribute RM23mil-RM25mil in pre-tax profit in FY14-15 premised on higher tourist arrivals. It adds that long-term catalyst includes larger capacity at its main airports in Siem Reap and Phnom Penh. With approximately half of airport revenues from passenger tax, the rising number of arrivals would have a positive impact on MEB’s bottomline.“It (Cambodian airport operations) has been growing by double digit in high teens (17%-18%) for the last few years. With a larger base now, we foresee it can still continue its growth momentum,” Lee says.
CIMB says MEB’s order book has significant upside potential and expects the group’s shipyard orders to rise in line with the pick-up in domestic chartering contracts for oil and gas.“We gather that the continuous construction of offshore oil and gas structures, particularly rigs and platforms, has created pent-up demand for vessel orders. We also expect an uptick in orders from the civil/infra segment in 2014 to comprise the bulk of the group’s estimated RM4bil-RM5bil tender book. Our base case assumption of RM1bil new job wins in 2014 remains intact.For the full financial year 2013, MEB posted a net profit of RM85.18mil against a net loss of RM93.2mil. Its revenue stood at RM1.89bil. The company has recommended that a first and final tax exempt dividend of 9% (4.50 sen) per ordinary share of 50 sen totalling RM18.9mil for FY13.