Results

Below expectations: 9M13 PATAMI dropped 5% yoy to RM135m, making up 58% and 56% 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 delay in recognition of variation order. To note, our FY13 full year earnings forecast will be significantly lower if variation orders do not materialise in 4Q13 and only recognise in FY2014.

Dividend

None.

Highlights

3QFY13 revenue fell by 46% yoy and 43% qoq as projects in hand are nearing completion with relatively lower value of progress claims remaining. The company has successfully delivered Damar Jacket & Topside, F14 jacket and advanced fabrication of Tapis-R integrated deck. Operating margin rebounded from 7% in 2Q13 to 9% in 3Q13 due to tail-end profit recognition of some existing projects and positive contribution from the repair project of 2 rigs.

We understand that several major changes in orders are currently in the midst of finalisation (slated for 4QFY13). These orders are to ensure additional cost of work done is recoverable. If there is any delay in recognition, our FY13 earnings forecast will be significantly lower. However, we believe it is just a matter of timing of recognition.

Recalled MMHE and Technip JV have just won an EPCIC contract for SK316 gas projects. The contract value is around RM1.1bn which is lower than our top end estimation of RM1.6bn in previous report. We understand that MMHE’s portion consisting of project management, procurement, fabrication and pre-commissioning, while Technip’s portion will be for front end engineering and design (FEED), installation, hook-up and commissioning.

This win will increase the current orderbook from RM1.5bn to RM2.6bn. However, it will only be contract replenishment to sustain but not boost revenue going forward. In our assumptions, we have factored 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

FY13 revenue and PATAMI cut by 10% to RM2,805m and RM210m respectively, to reflect lower contract revenue recognition but maintained our forecast for FY14 and FY15.

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 with an unchanged TP of RM3.77 based on an unchanged multiple of 20x on FY14 EPS of 18.8sen/share.

Source: Hong Leong Investment Bank Research - 23 Oct 2013