- We maintain our HOLD rating on Malaysia Marine and Heavy Engineering (MMHE) with an unchanged fair value of RM1.30/share, based on an FY15F PE of 16x.

- The group reported 2QFY15 core net profit of RM31.3mil (-28% QoQ, +25% YoY), which brings 1HFY15 to RM56.4mil (-16% YoY). This accounts for 45% of our fullyear estimates and 43% of consensus’.

- The group’s 1HFY15 core net profit declined by 16% YoY as the offshore business unit’s operating profits fell by 79% due to lower completed projects during the period. Furthermore, MMHE also made additional cost provisions for the Malikai tension leg platform (TLP) project, of which the group is pursuing compensation from its client.

- However, the marine business unit’s operating profit increased by more than 100% due to higher value of vessels repaired, especially rigs and FSOs.

- We expect earnings in 2HFY15 to improve from the profit recognition of Malikai TLP and SK316 CPP as the projects get nearer to completion. The Malikai TLP is currently 83% completed, while the SK316 CPP is 86% completed.

- The group’s order book declined by 13% QoQ to RM1bil. Year-to-date, MMHE secured ~RM400mil worth of contracts. These comprise, among others, the fabrication of substructures for the Baronia CPP-B project, Kanowit hook-up and commissioning (HUC) job and a recently awarded Facility Improvement Project, which includes HUC, major construction works and structural/mechanical retrofit for a two-year contract period with a one-year option for extension.

- MMHE currently has a tender book of RM7bil, of which RM4.5bil are for overseas projects and the rest local. We understand that the overseas tenders consist of onshore fabrication and offshore projects in the Middle East, Africa and Canada, which involve mostly subcontracts and JVs. These jobs are expected to be awarded next year.

- The bulk of the domestic tender is made up of the Kasawari central processing platform (CPP) project, potentially worth RM1.5bil, as well as onshore subcontract works for the refineries and crackers for RAPID, expected to be awarded at the end of this year at the earliest.

Source: AmeSecurities Research - 29 Jul 2015