Results

Below expectations: 1HFY14 Core PATAMI dropped 14% yoy to RM84m, making up 42% and 36% of HLIB and consensus full-year estimates, respectively.

Deviations

Profit has yet to be recognised for the Malikai and SK316 project due to its early stage of fabrication coupled with changes in profit recognition for EPCIC project.

Highlights

2QFY14 revenue increased by 25% YoY and 46% QoQ due to progress contribution from SK316 project, additional works from Gumusut and some older projects. During the quarter, the company successfully delivered Tapis R Topsides and Kebabangan Topsides. Malikai and SK316 projects are 30% and 13% completed respectively as of June14.

However, operating profit fell 56% YoY and 33% QoQ mainly due to profit has yet to recognise for Malikai and SK316 project and one-off VSS expense of RM10m. Exclude the one-off VSS expense, core PATAMI increased by 5% YoY.

We understand that the company will adopt a new profit recognition method for EPCIC project. This is more conservative profit recognition and better reflects the execution risks in EPCIC contract. In a nutshell, most of the profit for EPCIC contract going forward will be recognised toward end of the project in tandem with reducing risk.

We understand that the company is still negotiating variation orders with the customers. Successful claim will help to boost earnings. To note, we have not factored in any variation orders in our earnings. Current orderbook stood at RM1.8bn (versus RM2.3bn in 1Q14) with 89% from TLP Malikai and SK316 projects. Both Malikai and SK316 are expected to complete in 4Q14.

Overall, the company is tendering RM4-5bn worth of contract and targeting RM1.5bn contract win by 2H14. With yard utilisation around 50%, MHB should benefit from the increasing availability of fabrication job going forward.

Despite the expectation of strong contract newflows for fabrication in 2H14, we believe it will only be contract replenishment for MHB to sustain but not boost revenue going forward. We have already factored in RM2bn 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

We cut FY14 and FY15 earnings by 14% and 4% respectively after take into account slower profit recognition for Malikai, SK316 and new EPCIC projects due to new accounting method.

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 a TP reduced from RM3.87 to RM3.71 based on an unchanged multiple of 20x FY15 EPS of 18.5sen/share.

Source: Hong Leong Investment Bank Research - 6 Aug 2014