- We maintain our HOLD rating on Malaysia Marine & Heavy Engineering Holdings (MMHE) with a lower fair value of RM1.30/share (from RM1.40/share previously), based on an unchanged FY15F PE of 16x.

- We trim our FY15F-16F earnings by 7% as the group’s 1QFY15 core net profit of RM25.1mil came in below expectations, accounting for 19% of our previous estimates and 18% of consensus’. The 1QFY15 core net profit exclude:- 1) RM2.4mil net impairment loss on trade receivables; and 2) unrealised foreign exchange gain of RM13.3mil.

- The group’s 1QFY15 revenue grew by 41.5% QoQ, due to progress attained from its ongoing projects and the final settlement of Gumusut Kakap for its offshore business, as well as higher value of conversion and refurbishment works for its marine business unit.

- However, the group’s operating profits declined by 15% QoQ, as its offshore business recorded operating losses of RM4mil due to the group’s recently implemented and more conservative accounting policy which backloads profits from the Malikai tension leg platform (TLP) and SK316 central processing platform (CPP) toward the tailend of the projects. This was partially offset by its marine business which saw an increase in operating profits by 20%.

- We expect earnings in the coming quarters to improve from the profit recognition of Malikai TLP and SK316 CPP as the projects gets nearer to completion. The Malikai TLP is currently 77% completed, while the SK316 CPP is 61% completed.

- However, the outlook on the fabrication segment remains gloomy as orderbook replenishment would continue to be a challenge in the near term as the impact of slower project rollouts and delays in the award of new tenders will be more significant for domestic-centric upstream players. This is amid Petronas’ recent announcement of a 15%-20% reduction in capex.

- Furthermore, local fabricators are facing increased competition from foreign competitors, as seen in the award of the Bergading and Bardegg 2-Baronia EPCIC contracts to Hyundai Heavy Industries.

- The group’s orderbook declined by 25% QoQ to RM1.2bil, with the Malikai TLP and SK316 projects representing the bulk of it.

- The stock now trades at FY15F PE of 16x, down from its mean of 34x, as the group operates in an environment of a slowdown in order flow and contracting margins due to persistent high costs and project complexity.

Source: AmeSecurities Research - 29 Apr 2015