Monday, October 2

MMHE’s cost restructuring positive for overall turnaround


KUCHING: Given Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) new initiative to revamp cost control measures at its Pasir Gudang fabrication yard, the group has been regarded as making a painstaking but positive turnaround moving forward.

MMHE’s managing director Dominique de Soras recently addressed the issues that caused inefficiency at the yard and to curb costs, the group had inked new procurement agreements as part of its revamped cost structure.

A research analyst at CIMB Investment Bank Bhd (CIMB Investment) yesterday noted that the company used to deal with more than 200 external parties, resulting in 50 per cent to 70 per cent of costs tied to various subcontractors and vendors outside the company.

“This heavy supply chain is progressively being eradicated as MMHE had last month signed long-term agreements with selected contractors and vendors for the supply of materials.

“This, coupled with other initiatives that have been put in place over the past year, has resulted in a 20 per cent saving in procurement costs.

“We are pleasantly surprised by de Soras’ candour in addressing some of the company’s weaknesses: the yard’s inefficiency, the company’s shrinking order book and delays relating to the Gumusut-Kakap structure.

“We are also encouraged by management’s efforts to put costs in check. We have yet to see the full impact of the cost overhaul, but we believe it is a step in the right direction,” the analyst stated.

She noted that MMHE, with a market capitalisation of RM6.37 billion, had bid for RM5 billion worth of jobs locally and internationally to expand its order book and improve earnings visibility.

The group might “also bid for ExxonMobil’s and Shell’s enhanced oil recovery contracts and Carigali-Hess’ North Malay Basin contract”, she added.

MMHE’s share price had ‘bombed out’, reaching an all-time low of RM3.75 per share last month, lower than its RM3.80 initial public offering price upon its listing in October 2010.

This was also substantially below its record high of RM8.43 per share which was hit in June 2011. Since CIMB Investment’s initiation, the share price had fallen 28 per cent.

“Having learnt the bitter lesson from the fabrication of the Gumusut-Kakap floating production system, which was plagued by delays in delivery and ballooning costs, MMHE has put its best foot forward for the Malikai tension-leg platform project, which was secured in February.

“Separately, we have learned that the Gumusut-Kakap FPS (floating production storage) will finally be loaded out on April 25, putting a close to a painful chapter,” the analyst stated.

She revealed a higher target price of RM4.11 per share (up six sen), based on 18.9 times 2014 forecast price earnings ratio (PER), an unchanged 40 per cent premium over the in-house revised 2013 target market PER of 13.5-fold.