Results

• Inline: 1QFY15 PATAMI increased by 4% YoY, making up 26% of HLIB and consensus full-year estimates.

Deviations

• Partly contributed by forex gain (due to strengthening USD against MYR) of RM13.3m.

Highlights

• 1QFY15 revenue increased by 7% YoY and 42% qoq mainly due to progress recognition from on-going SK316 coupled with higher number of marine vessel repaired.

• However, EBIT margin decreased from 5.1% to 4.9% mainly due to margin pressure at offshore fabrication segment but partly offset by forex gain. Offshore fabrication barely profitable at EBIT level mainly due to higher additional cost to complete some existing projects.

• In 1QFY15, MHB secured a HUC contract for the Kanowit project worth RM30.4m coupled with a marine repair and refurbishment contract from South Korea’s Pan Ocean.

• Malikai and SK316 remained the core existing on-going projects for the company and expected to be completed in FY15. 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 RM1.6bn in 4Q14 to RM1.2bn in 1Q15. Overall, the company is tendering more than RM3bn worth of contract both locally and internationally and expect tender result to be announced in FY15. Industry outlook for fabrication remains bleak as the plunge 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 weak 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 and Orderbook replenishment failure.

Forecasts

• Unchanged.

Rating

SELL

Positives

• Room to grow yard capacity and capability.

Negatives

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

Valuation

• Maintained SELL with TP adjusted from RM1.24 to RM1.11 after rolled forward valuation to FY16 based on unchanged 14x P/E.

Source: Hong Leong Investment Bank Research - 28 Apr 2015