Target RM1.23 (Stock Rating: ADD)

THHE has proposed a placement of up to 10% with the first tranche of 5% to be placed to Pelaburan Mara Berhad (PMB) at 80 sen/share. THHE, which already counts LTH and Tan Sri Quek Leng Chan as its major shareholders, has earmarked the RM42m gross proceeds from the 5% placement for its yard expansion and FPSO venture. We maintain our forecasts for now but flag that we would cut our FY14-16 EPS by 1-4% for a bigger share base following the completion of the 5% placement. We continue to value the stock at a CY15 P/E of 16.4x, a 30% discount to the average P/E of the O&G big caps. A growing order book and a successful FPSO venture are the potential re-rating catalysts. THHE remains an Add and our top pick among the O&G small caps.

What Happened 

THHE has proposed a placement of new shares of up to 10%, of which the first  tranche of 5% or 52.796m shares will be placed to PMB at 80 sen/share. The  gross proceeds of RM42m from the 5% placement will be used to facilitate  THHE's yard expansion and floating production, storage and offloading (FPSO)  venture. The 5% placement is slated for completion by mid-Oct. 

What We Think 

Established in 1967, PMB is an investment and asset management company  wholly-owned by Majlis Amanah Rakyat (MARA), a government agency. PMB is making an entrance into THHE amidst the latter's operational improvement.  To recap, THHE went through a rough patch in 2Q, prompting it to make  RM9m provisions for the fabrication and transport & installation businesses.  However, we understand that the company has returned to the black in 3Q and  aims to secure a sizeable fabrication contract by year-end to expand its order  book of RM1.5bn at end-Aug (Figure 1). PMB will be THHE's third largest  shareholder, after Lembaga Tabung Haji (LTH) (31.6%) and Tan Sri Quek (9.1%). Imputing the new shares from the 5% placement, we expect to lower  our fully-diluted EPS by 1% for FY14, 4% for FY15 and 4% for FY16. 

What You Should Do  

Accumulate the stock following the recent share price fall brought about by the soft 2Q. The fabrication business is lumpy but we take comfort in the long-term  nature of the FPSO business, which landed an 8+10 US$372m contract in May.  Furthermore, the stock's valuations are undemanding at 9-13x FY15-16  earnings, lower than the sector average of 14-16x. 

Source: CIMB Daybreak - 25 September 2014, Full PDF Report