Malaysia Marine and Heavy - Engineering

Malaysia  Marine  and  Heavy  Engineering  Holdings  (MMHE)’s  9MFY12  results  lagged  our  and  consensus’  expectations.  The  poorer-than-expected  results  were  mainly  due  to  provisions  made  for  its  FPSO  Cendor  project  and  corporate  taxes  relating  to  its  Turkmenistan  Phase  1  Project.  We  are  retaining  our  NEUTRAL  recommendation  on  the  stock  but  are  revising  downward  our  fair  value  (FV)  to  RM4.76  following  our  earnings  downgrade  and  ascribing  a  lower  PE  multiple  of  22x vs 23x previously.

 Below  estimates.  MMHE’s  9MFY12  net  profit  fell  short  of  our  and  consensus  expectations, accounting for only 43.1% of our initial estimate and 34.1% of consensus  numbers. Net profit dived 85.4% q-o-q and 50.8% y-o-y, mainly attributed to provisions  arising  from  design  changes  and  requirements,  which  we  estimate  at  some  RM50m-RM55m.  These  were  related  to  the  floating,  production,  storage  and  offloading  vessel  (FPSO)  Cendor  conversion  project.  Net  profit  was  also  weighed  down  by  the  111.6%  slide  in  total  contributions  from  its  share  of  profits  from  jointly  controlled  entities.  We  understand that the losses amounting to RM8.0m vs a profit of RM69.2m over the same  period last year was attributable to a corporate tax of RM18m the company paid due to  the termination of its Turkmenistan Phase 1 project.
 
Lowering FY12-FY13 earnings forecast. We understand from the management that it  is currently negotiating with the client and hopes to claim back the bulk of the additional  expenses arising from the changes in the FPSO job. Nonetheless, we are lowering our  FY12 and FY13 earnings forecast by 38.0% and 6.5% respectively as the write-backs, if  any, would probably only materialize in FY13.

RM2.3bn-strong  orderbook  as  at  Sept  2012.  One  of  the  notable  projects  MMHE  secured recently is the RM160m Damar platform contract for ExxonMobil, which beefed  up  its  orderbook  to  RM2.3bn  as  at  Sept  2012.  However,  on  a  sequential  basis,  the  group’s  orderbook  actually  shrank  18%  q-o-q.  That  said,  we  understand  from  management  that  its  tenderbook  totals  RM5bn  and  that  it  expects  to  replenish  the  company’s orderbook “very soon” after it finalizes the terms and conditions of a letter of  award  for  the  RM1bn  Malikai  tension  leg  platform  contract  which  it  was  awarded  recently. The management also guided that it expects to achieve mechanical completion  of  the  Gumusut-Kakap  floating  production  storage  (FPS)  semi-submersible  project  by  next month and load-out in 1HFY13.

Maintain NEUTRAL. We are pegging the stock to a lower PE of 22x vs 23x due to the  company’s unexciting  near  term  prospects.  We  are  adjusting  downward  our  FV  to  RM4.76 from RM5.32 before, on incorporating our earnings downgrade and lower PE.

 Source: OSK