M’sian Marine & Heavy Engineering - FPSO variation costs may be written back next year Hold

- We maintain our HOLD recommendation on Malaysia Marine & Heavy Engineering Holdings (MMHE), with an unchanged fair value of RM4.60/share based on an FY13F PE of 20x – 10% below Kencana Petroleum’s peak of 22x in 2007.

- MMHE’s 9MFY12 net profit of RM142mil came in below expectations, accounting for 47% of both our earlier FY12F estimates and consensus. This stemmed from provisions arising from variation orders, which we estimate at over RM50mil, for the floating, production, storage & offloading vessel (FPSO) Cendor conversion project. Hence, we have cut FY12F net profit by 33%.

- But we maintain our FY13F-FY14F earnings with unchanged new order assumptions of RM4bil-RM5.5bil. Hence, our fair value, which is pegged to FY13F earnings, remains intact. 

- We caution that there is an upside bias from write-backs to our FY13F earnings, as MMHE is negotiating to claim back the bulk of the additional variation order expenses caused by design changes in the FPSO Cendor job.

- MMHE’s 3QFY12 net profit fell 85%% QoQ to RM8mil largely due to:- (1) additional expenses from the FPSO Cendor design changes; (2) normalisation of revenue recognition for the Kebabangan contract as progress completion rose 6ppts to 42% compared to the entire 36% accounted for in 2QFY12, when the project was finally novated from Sime Darby Engineering, and (3) RM18mil loss from outstanding corporate tax from 2006-2009 from the completed Turkmenistan Phase 1 project.

- Even with addition of the RM160mil Damar platform contract for ExxonMobil Exploration & Production, the group’s order book contracted by 18% QoQ to RM2.3bil due to insufficient replenishment of fresh jobs. 

- But order book growth will return as the RM1bil Malikai tension leg platform contract, for which MMHE has already received the letter of award, is being finalised and will be announced soon. We are positive that the long-delayed Gumusut-Kakap floating production storage (FPS) semisubmersible project remains on track, with mechanical completion expected by next month and load-out in 2QFY13.

- We understand that the group is tendering for projects worth up to RM5bil of which 2/3 stems from domestic jobs. The overseas projects include the Browse jackets in Australia for Woodside Petroleum and the 6,000 tonne platform for Central Diyabekir field in Turkmenistan, in which the success rate and rollout timeline are not as visible vis-a-vis domestic jobs.

- The stock trades at an unexciting FY13F PE of 21x vs. 19x for oil & gas stocks with market capitalisation of over RM1bil. There is a strong possibility that MMHE will be dropped from the FBMKLCI index, along with the inclusion of SapuraKencana Petroleum and FELDA Global Ventures Holdings.  

Source: AmeSecurities