- We maintain our BUY call on Malaysia Marine & Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM4.30/share based on a FY14F PE of 25x – a 13% premium to Kencana Petroleum’s peak of 22x in 2007.

- We have cut MMHE’s FY13F earnings by 11% due to a 1%-point reduction in EBITDA margin assumption to 9%. However, we maintain FY14F-FY15F earnings with unchanged new order assumptions of RM3bil-RM3.3bil.

- As we have forewarned in our reports since April this year, the group’s 9MFY13 net profit of RM135mil (-5% YoY) came in below expectations, accounting for 58% of our earlier FY13F earnings estimate of RM232mil and 56% of general consensus’ RM239mil.

- MMHE’s 3QFY13 revenue slid by 43% QoQ to RM450mil with the completion of the Gumusut-Kakap floating production storage semi-submersible and F14/F29 topside modular structures, Damar platform and advanced completion stage for Tapis-R integrated deck. The group’s 3QFY13 net profit fell by 23% QoQ to RM36mil as the decline in the offshore segment was partly offset by stronger contributions from the marine division which benefited from the conversion of two mobile offshore production units to mobile offshore drilling units.

- We expect stronger QoQ 4QFY14 earnings largely from recognition of variation orders for the completion of the Gumusut-Kakap FPS, Telok B topsides, Tapis R and Cendor FPSO conversion jobs. However, management has not revealed the full quantum as it is still in negotiation with clients.

- The group has recently secured the SK316 project, which involves the fabrication of a central processing platform linked to a well-head platform. While the value of this contract - likely to be over RM1bil - is still being finalised, we estimate that MMHE’s order has risen by 39% from RM1.8bil as at end-2QFY13 to RM2.5bil, or 0.8x of FY14F revenue.

- We have already highlighted in our past reports that the Malikai tension leg platform contract, secured in February this year, and any additional orders secured by the end of 2013 could only begin profit contributions FY14, as MMHE’s accounting policy recognises earnings when work progress has reached the completion stage of 25%. Hence, we believe that the market has already priced in the expected uneven earnings performance by MMHE over the next 2 quarters given the dearth of order flows since February this year.

- Since the beginning of this year, the group has secured new order intake of RM2.2bil compared to RM1.7bil in FY12. With MMHE hoping to secure the Bertam well-head fabrication contract - potentially valued around RM100mil - by the end of this year, we are sanguine on a pick-up in order flow momentum next year.

- The stock currently trades at an attractive FY14F PE of 19x – 30% below SapuraCrest Petroleum’s 2007 peak of 27x. 

Source: AmeSecurities