Results

• Below Expectation: 4QFY14 Core PATAMI (excluding forex gain) swung from profit to losses of RM6m, bringing FY14 to RM117m, making up 77% of HLIB and consensus full-year estimates, respectively.

Deviations

• Due to provision of RM35m for additional costs from certain projects in 4QFY14.

Highlights

• YoY, FY14 revenue fell by 6% as several offshore projects have completed and sailed away. Core profit excluding RM23m forex gain (due to strengthening USD against MYR) fell 50% YoY due to lesser projects in progress, provision of RM35m for additional costs from certain projects coupled with lower margin from marine business.

• Malikai and SK316 projects are 72% and 49% completed respectively as of Dec 14. Under the new accounting method, we expect higher profit recognition for both projects on the subsequent quarters. Variation orders for Tapis project remain under negotiating. Successful claim will help to boost earnings. We have not factored in any variation orders in our earnings.

• Current orderbook shrink from RM1.7bn in 3Q14 to RM1.6bn in 4Q14. Both Besar A and Bergading platform are at the early stage of construction. Overall, the company is tendering more than RM3bn worth of contract and expect tender result to be announced in FY15. Industry outlook for fabrication remains bleak as the plunged in oil price has delayed capex spend and margin squeeze due to intense competition (especially from Korean shipyards).

• We expect dry spell for contract newsflow in upstream sector with potential fabrication contract further delay 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.

Risks

• Execution risk; Orderbook replenishment failure.

Forecasts

• FY15 and FY16 earnings reduced by 14% and 25% respectively after take into account slower orderbook replenishment.

Rating

HOLD

Positives

• Room to grow yard capacity and capability.

Negatives

• History of delivery delays and earningsdisappointments. Difficult to source engineering and project talent.

Valuation

Downgrade from HOLD to SELL with TP reduced from RM1.43 to RM1.24 based on an unchanged multiple of 14x posted earning downgrade.

Source: Hong Leong Investment Bank Research - 6 Feb 2015