- 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 27x and at parity to SapuraCrest Petroleum’s peak in 2007.

- We have fine-tuned MMHE’s FY14F-FY15F earnings, with new order assumptions unchanged at RM3bil-RM3.5bil. We introduce FY16F earnings with a 17% growth and a new order intake assumption of RM4bil vs RM2.6bil in FY13.

- As we have forewarned in our reports since April last year, the group’s FY13 pre-tax profit of RM197mil (-9% YoY) came in 6% below our forecast, and 12% below street estimates. But a positive tax charge due to capital allowances on the group’s yard optimisation programme caused net profit of RM237mil (-2% YoY) to come in 14% above our and market expectations.

- MMHE’s 4QFY13 revenue surged by 62% QoQ to RM726mil with the finalisation of the Gumusut-Kakap floating production storage semi-submersible, Tapis-R integrated deck, Malikai tension leg platform (TLP) and several variation orders including the Cendor FPSO conversion job.

- The group’s 4QFY13 pre-tax profit rose by 14% QoQ to RM47mil, partly offset by a 2.5ppt EBIT margin contraction to 6.5% as profit will not be recognised for the Malikai TLP job until it reaches the completion stage of 25% in 2QFY14.

- We expect MMHE’s 1QFY14 earnings to be lower QoQ as the completion of some of the major projects, e.g. the Tapis and Kebabangan platforms and the Cendor FPSO conversion job, has been extended from end-FY13 to 2QFY14.

- With the RM1.3bil SK316 project secured late last year, MMHE’s order has risen by 73% QoQ from RM1.5bil as at end-3QFY13 to RM2.6bil, or 0.9x of FY14F revenue.

- In 2HFY14, the average yard utilisation for the group will fall from 60% currently to 50% and will be focused mainly on the Malikai TLP and SK316 projects. With ample yard capacity, the group will be able to take on at least 2 more central processing platform (CPP) jobs worth US$1bil. With the huge tenders for the Baronia, Sepat, Bergading, Bokor and Dulang CPP jobs up for grabs, we expect a resurgence in newsflow cycle to underpin MMHE’s re-rating catalysts.

- We have already highlighted in our past reports that the Malikai TLP contract, secured in Feb 2013, and any additional orders secured by the end of 2013 could only begin profit contributions from 2QFY14 onwards, 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 for the next one quarte

Source: AmeSecurities