- We maintain our HOLD rating on Malaysia Marine and Heavy Engineering (MMHE) with an unchanged fair value of RM1.00/share, based on an FY16F PE of 13x.

- Excluding the net unrealised forex gain of ~RM42mil and derivatives hedging gains of RM1.7mil, the group reported a core net loss of RM26mil for 3QFY15, bringing total 9MFY15 core net profit to RM30mil (-74% YoY). This accounted for only 24% of our full-year estimates and 25% of consensus’.

- The weak result is largely due to additional cost provisions made by the group for the Malikai Tension Leg Platform (TLP) project and absence of investment tax allowance (ITA) claims for the period.

- We have cut FY15F earnings by 63%, to account for the additional cost provisions made by the group and income tax charges – as we have previously assumed an ITA claim of RM20mil.

- We understand that the group is pursuing compensation for the additional TLP costs from its client as variation orders, but this is only expected to materialise in 1HFY16F. We leave our FY16 and FY17 estimates unchanged for now, pending further guidance from management.

- However, the marine business unit’s operating profit increased by more than 2x due to higher value of vessels repaired from LNG vessels, rigs, FSUs and FPSOs.

- The group’s order book declined by 6% QoQ to RM955mil. Year-to-date, MMHE secured ~RM700mil 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 RAPID package-5 for pipe fabrications.

- MMHE currently has a tender book of RM4bil, of which RM1.8bil are for ongoing bids for several RAPID packages. The Kasawari central processing platforms (CPP) project, potentially worth RM1.5bil, as well as several tenders in Middle East and Africa, have been delayed.

- The two Goliath cranes that are due for completion in December 2015 and March 2016, respectively, will generate an estimated savings of RM8-12mil per year once operational.

- The stock is currently trading at an FY16F PE of 14x.

Source: AmeSecurities Research - 4 Nov 2015