-  We maintain our SELL call on Malaysia Marine & Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM3.30/share based on a FY14F PE of 20x – at a 10% discount to Kencana Petroleum’s peak of 22x in 2007 but at parity to the larger oil & gas stocks with market capitalisation of over RM1bil.

-  We maintain MMHE’s FY13F-FY15F earnings for now on expectations of variation orders for works undertaken for the Gumusut-Kakap floating production storage semisubmersible (FPS), Tapis-R central processing platform and the Cendor floating, production, storage and offloading (FPSO) vessel conversion.

-  Nevertheless, the group’s 1HFY13 net profit of RM98mil (-27% YoY) came in below expectations, accounting for only 42% of our earlier FY13F earnings of RM232mil and even lower 37% of general consensus’ RM267mil. Note that our forecasts are currently 11%-16% below street estimates.

-  MMHE’s 2QFY13 revenue slid by 15% QoQ to RM787mil with the completion of the Gumusut-Kakap FPS and Teluk B topside projects. The group’s net profit slid by only 6% QoQ to RM48mil as offshore operating margins rose 1%-point to 5%, buoyed by the completion of these projects and stronger contributions from marine repair jobs for liquefied natural gas vessels.

-  We understand that there were variation orders for the completion of the Gumusut-Kakap FPS, Telok B topsides, Tapis R and Cendor FPSO conversion jobs, but management has not revealed the full quantum, which is still under negotiation with clients. Recognition for these additional works could translate to a lumpy earnings profile in 2HFY13.

-  As indicated in our earlier reports, the group is still aiming to secure over RM1bil of fresh orders, involving a large central procession platform and smaller structures from Petronas, by 4QFY13. But this means that with an estimated depletion rate of RM800mil per quarter, MMHE’s order book could slide by 44% from RM1.8bil as at end-2QFY13 (See Chart 4) to RM1bil by end-3QFY13- translating to only 33% of FY14F revenue.

-  Any additional orders secured by the end of this year could only begin profit contributions in 2HFY14, as MMHE’s accounting policy only recognises earnings when work progress has reached the completion stage of 25%. But that will leave a significant timing difference in 1HFY14, as there has been a dearth of order flows since the last engineering, procurement and construction job for the Malikai tension leg platform that was awarded in February this year. There could also be further margin compression on new job tenders due to persistent competition from Korean yards, with Petronas’ increasingly open bidding stance to international players.

-  Hence, the stock currently trades at a pricey FY14F PE of 26x – above the average of 20x for oil & gas stocks with market capitalisations of over RM1bil.

Source: AmeSecurities