Results 

Broadly  inline :  9MFY14  Core  PATAMI  dropped  8%  yoy  to RM123m,  making  up  72%  and  80%  of  HLIB  and  consensus full-year  estimates, respectively.

Highlights 

YoY,  despite  3QFY14  revenue  increased  by  20%,  operating profit fell by 43% as new projects such as   Malikai and SK316 still  at  early  stage  with  minimal  profit to recognise. To recap, the  company  has  adopted  more  conservative  profit recognition  method  for  EPCIC  project  and  profit  will  only  be recognised  toward  end  of  the  projects.   Malikai  and  SK316 projects  are  41%  and  29%  completed  respectively  as of Sep 14.   

Marine  business  remains  sluggish  with  revenue  fell  YoY  and QoQ  due  to  lower  value  of  repair  work  for  LNG  and  special vessels.  However,  demand  will  remain  favourable  due  to increasing  need for dry docking and marin e  repair services.

We  understand  that  the  company  is   still  negotiating  variation orders  with  customers.   Successful  claim  will  help  to  boost earnings.  We  have  not  factored  in  any  variation  orders  in our earnings.  Current  orderbook  stood  at  RM1.675bn  (versus RM1.8bn  in  2Q14)  after  including  recent  RM350m  contracts win  for  both  Besar  A  and  Bergading  platform.      Malikai. Overall,  the company is tendering RM4-5bn  worth of contract.

We  expect  dry spell for contract newsflow in upstream sector with  potential  fabrication  contract  further  delay  until  after  Mar 15  amidst  weakening  crude  oil  price.  We  maintain  our  view that  any  contract  win  going  forward  will  only  be  contract replenishment  for  MHB  to  sustain  but   not  boost  revenue going  forward.  W e  have  already  factored  in  RM3bn orderbook  replenis hment  for  FY15.  

Risks

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

Forecasts

• We  continue  to  fine  tune margin assumption by  cutting  FY14 and  FY15  earnings  by  4%  and  16%  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  TP  reduced  from  RM2.39  to RM2.01  based on an unchanged multiple  of  16x FY15  EPS of 12.6sen/share.

Source: Hong Leong Investment Bank Research - 6 Nov 2014