- We maintain our SELL call on Malaysia Marine & Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM1.95/share, based on an FY15PE of 20x.

- The group’s 9MFY14F pretax profit came in below our estimates at 66%, while making up only 49% of consensus’ estimates. Our FY14F-FY16F pretax profit forecasts are 26%-41% below street estimates.

- However, due to positive tax charge from the investment tax allowance (ITA) for the group’s yard optimisation programme, 9MFY14 net profit represented 88% of our previous estimate.

- Hence, we raise our positive tax charge assumption by RM40mil to RM48mil for FY14F. This leads to a 31% increase in our FY14 net profit.

- However, we maintain our FY14F pretax profit on expectations that variation orders of up to RM100mil for FPSO Cendor and Tapis-R projects would make up forMMHE’s earnings in 4QFY14.

- The group’s 3QFY14 revenue declined by 45% QoQ due to the sail away of two major topsides – the Tapis-R deck for the Tapis Enhanced Oil Recovery (EOR) project and the Kebabangan topside structure – in 2QFY14. Notwithstanding that, operating profit remained flat QoQ due to provision reversal for the completed projects.

- YoY, MMHE’s 3QFY14 operating profit declined by 43% despite a 20% revenue growth due to the group’s more conservative accounting of profits from Malikai tension leg platform and SK316 central processing platform (CPP) projects that were implemented recently.

- Hence, we maintain that the Malikai TLP and SK316 CPP projects are unlikely to generate significant profit contributions for the rest of this year to early FY15F, due to the group’s recently implemented accounting policy.

- Likewise, even if MMHE secures additional jobs by the end of this year, the new orders will not significantly improve the group’s profit prospects in FY15F. Current order book stands at RM1.7bil (down 8% QoQ), with the Malikai TLP and SK316 projects representing the bulk of it.

- The stock now trades at a pricey FY15F PE of 24x for a sector which is experiencing a slowdown in order flows and contracting margins due to persistent high costs and project complexity amid a softer crude oil price environment.

Source: AmeSecurities