Will THHE Lift Off!

Will it Bounce?

Bursar KL will only allow uplifting of P17 status for a counter , if after restructuring, a company shows two consecutive quarters of successive profit performance.

That Tabung Haji Heavy Engineering (THHE) has done so. No problem there.

So, why is there this sudden spurt up to 55.5 sen today and then a fall-back?

Let us rewind. 

A couple of months ago, Lembaga Tabung Haji (LTH)  increased its shareholding in THHE by almost 25% by buying shares in open trading to have a "comfortable level of control" of the company. The purchase price averaged 40 sen per share. It had only 14% as at end 2010. It is still the biggest shareholder. 

In an exchange filing yesterday, TH Heavy Engineering said LTH acquired 130.11 million shares at RM0.40 sen a piece. As at Dec 30, 2010, LTH was the biggest shareholder of TH Heavy Engineering, holding 13.98% or 166.83 million shares. With the acquisition, it now holds a 32% stake in the company. So, why the need for this comfort level and no more? 

“The increase of shareholding by LTH is because they want to have a comfortable level of control in THHE. On why the shareholding stops at 32%, an insider source replied that they did not want to trigger a mandatory general offer,

TH Heavy Engineering's core activities include fabrications of major steel structures, engineering and offshore marine services.

Through its subsidiaries, the company fabricates offshore oil and gas-related structures.

Nor Badli has also recently subscribed for  400,000 ordinary shares of RM0.25 each in the company.

So, will this RM1 counter  which undertook a rights issue at 50 sen with an attached warrant component go up soon?

Market rumours are aplenty on THHE. While some say conservatively it should hit 80 sen,others are more bullish and so it will hit beyond RM1.

Let us look for some possible basis for this speculative mindset on THHE.

Rights issue was offered to all shareholders on 12 July 2012 on the following basis:

2 rights for every 5; equivalent to 400 shares per thousand at issue price of 40 sen.

On 10 August, the new rights were traded.

Let us read some write-up on this counter.

INVESTMENT MERIT

Likely upliftment of PN17.  After two years of being classified as a PN17-status company, TH Heavy Engineering (THHE), or formerly known as Ramunia Holdings, has gone through several corporate exercises to improve its financials. Today, it has turned profitable and has on 31 July submitted an application to SC for an early upliftment from being classified as a PN17 company. 

RM210m contracts for 12 months.  In Mar12, it secured a RM23.6m fabrication job from Aquaterra Energy Ltd for the West Desaru Project, which was completed in July12. Three months later, it won two sizeable fabrication jobs from Sarawak Shell, totalling RM177.5m, scheduled for deliveries in 2Q13. With this, THHE has an orderbook backlog of c.RM210m, which will support its earnings for the next 12 months.

Tabung Haji  is the majority shareholder.  After its recent corporate restructuring, Tabjung Haji now owns a 32% equity stake in THHE, an increase from 29% previously. This, in our view, could boost the public confidence in the company for its future growth prospect.

Fairly valued.  The potential upliftment from PN17 status has caused the share price to rise 13% in the past week. While we reckon that THHE is financially stronger now and more profitable, we however, see little upside from here. THHE is fairly valued at RM0.55 based on 8.5x FY13 PER (ex-cash from the rights issue), which is our average targeted PER for small cap Oil & Gas stocks. On the downside, the rights price of RM0.40 should serve as a floor valuation.

SWOT ANALYSIS

Strength:  Strategic location of its newly acquired 57-acre integrated fabrication yard in Port Klang, with an annual capacity of 10,000 mt.

Weaknesses:  Its current PN17 status could challenge its ability to secure more contracts.

Opportunities:  Business expansion into lucrative FPSO market by acquiring a FPSO vessel. 

Threats: Margin contraction from FPSO segment due to pricing competition with the big boys.

TECHNICALS

Resistance: RM0.585 (R1), RM0.65 (R2), RM0.715 (R3)
Support: RM0.475 (S1), RM0.44 (S2), RM0.39 (S3)
Views: Bullish in the S-T & M-T
Comments: TH Heavy has just broken above the short term ascending triangle. Immediate TP of RM0.575 with the first level of support at RM0.475. Buy on weakness.

BUSINESS OVERVIEW

TH Heavy Engineering is involved principally in the fabrication of offshore steel structures and the provision of other related offshore O&G engineering services in Malaysia. In order to secure more opportunities from the O&G sector and being part of its business growth plan, the group has decided to foray into marine vessels services as its first step to explore within the expansive O&G activities chain. 

BUSINESS SEGMENTS

Offshore Structures Fabrications.  Core business which focuses on the fabrication of offshore oil and gas facilities, including substructures, platforms and topsides.

HUC & Topside Major Maintenance.  It offers offshore topsides modifications, upgrades, shutdowns, repairs and de-commissioning of existing or abandoned platforms. (Both these segments contributed 90% of the group's 1H12 revenue.)

Offshore Crane Manufacturing. This division is housed under its wholly owned subsidiary, O&G Works Sdn Bhd, and has been granted the license to manufacture offshore and marine crane.

Marine Services.  This is a newly ventured business that enables the group to  minimise the risk of its dependency on fabrication jobs. The acquisition of RM248.4m of FPSO vessel is part of its strategy to tap into demand for services in marginal oilfield development.

We will discuss more in another post.