Results

• Below Expectation: 1HFY15 PATAMI fell by 27% YoY, making up 39% of HLIB and consensus full-year estimates.

Deviations

• Lower margin for offshore segment due to additional provision cost made for Malikai TLP project.

Highlights

• 1HFY15 revenue fell by 21% YoY as most projects have been completed and sail-away coupled with newly secured projecst are still at early stages.

• EBIT margin fell from 2.4% to 1% mainly due to margin pressure at offshore fabrication segment arising from additional provision cost made for Malikai TLP.

• Malikai and SK316 projects are 83% and 86% completed respectively as of June 15. The company are pursuing variation orders for Tapis and Malikai projects. Successful claim will help to boost earnings. We have not factored in any variation orders in our earnings.

• Despite YTD secured RM360m contract from offshore and marine, current orderbook shrink from RM1.2bn in 1Q15 to RM1bn in 2Q15. MHB is bidding for more than RM7bn worth of contracts, majority from overseas (RM4.5bn) and remaining from local (RM2.6bn). Oversea market to focus is Middle East, Canada and Africa. Potential local contracts comprise of RM1.5bn Kasawari CPP contracts and RM1bn fabrication jobs from RAPID. The company is positive to secure 1 or 2 bigger projects by later this year or early 2016.

• 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 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

• FY15 earnings reduced by 9% after factored in lower margin for offshore segment.

Rating

HOLD

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 HOLD with unchanged TP adjusted from RM1.33 to RM1.32 based on 0.8x BV post earning downgraded.

Source: Hong Leong Investment Bank Research - 29 Jul 2015