Results

Below expectations: 1H13 PATAMI dropped 26% yoy to RM98m, making up 36% and 37% of HLIB and consensus full-year estimates, respectively.

Deviations

Profit has yet to be recognised for the Malikai project due to its early stage of fabrication and higher than expected costs on some ongoing projects.

Dividends

None.

Highlights

2Q13 revenue fell by 19% yoy and 15% qoq as projects in hand (such as Gumusut Kakap and Telok Gas Development) are nearing completion with relatively lower value of progress claims remaining.

Operating margin rebounded slightly from 6% in 1Q13 to 6.7% in 2Q13 mainly attributed to recognition of some of the variation orders from various projects. We understand that the company is still negotiating with several clients to ensure additional cost of work done is recoverable, which will further improve margin going forward.

The company has booked in ~RM100m from Malikai project but have not recognised any profit yet due to its early stage of fabrication. Marine business segment posted profitability improvement through better efficiency and more LNG vessel repair projects. MHB has also secured 2 projects for refurbishment and conversion of MODU to MOPU and expects to win more similar contracts in the future.

It urgently needs to replenish shrinking orderbook. The current orderbook has decreased to RM1.8bn (~55% from TLP Malikai project) in June 13 from RM2.3bn in Mar 13. We understand it is currently tendering for RM4.5bn worth of jobs and expects to win RM1bn by end of 2013. However, that will only be contract replenishment to sustain but not boost revenue going forward. In our assumptions, we have factor in RM2.5bn and RM3bn orderbook replenishment for FY14 and FY15 respectively.

Risks

• Problems sourcing O&G knowledge workers for growth.
• Execution risk and orderbook replenishment failure.

Forecasts

PATAMI cut by 15.6%, 4.7% and 4.7% to RM232m, RM302m and RM357m in 2013, 2014 and 2015 respectively, to reflect more conservative margin assumptions due to stiff competitions from Korea and Singapore yards.

Rating

HOLD

Positives –

First bite of the cherry for local oil and gas projects. Room to grow yard capacity and capability.

Negatives –

History of delivery delays and earnings disappointments. Difficult to source engineering and project talent.

Valuation

Maintain our HOLD rating but with a lower TP of RM3.77 based on an unchanged multiple of 20x on lowered FY14 EPS of 18.8sen/share.

Source: Hong Leong Investment Bank Research - 15 Aug 2013