Results

• Below Expectation: YoY, 3QFY15 core PATAMI swung from profit to loss, bringing 9MFY15 PATAMI to RM29m, only making up 22% and 24% of our earnings and consensus estimates.

Deviations

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

Highlights

• 3QFY15 revenue fell by 20% YoY due to lower recognition from SK316 and Malikai and partly offsetting by higher marine revenue.

• Offshore business registered operating loss mainly due to completion of most projects and additional provision made for Malikai TLP project. We expect provision will likely continued in 4QFY15 as Malikai project still has remaining orderbook of RM165m.

• Malikai and Besar A projects are 84% and 69% completed respectively as of Sept 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. Marine segment increased YoY and QoQ mainly due to higher value of vessels repaired and expect to cushion the downturn in the offshore business.

• Latest orderbook shrink from RM1bn in 2Q15 to RM1bn to RM955m in 3Q15. MHB is bidding circa RM4bn worth of contracts, majority from overseas (RM2.2bn) and remaining from local RAPID (RM1.8bn). Kasawari CPP and some other contracts from Middle East and Africa are delayed.

• 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). Meanwhile, we are concern about the shrinking orderbook given it has less than 1x cover ratio.

Risks

• Execution risk and Orderbook replenishment failure.

Forecasts

• FY15 and FY16 earnings reduced by 66% and 39% after factored in lower margin and additional provision made 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 TP adjusted from RM1.32 RM1.10 based on 0.7x BV (versus 0.8x previously) concern on cost overrun and shrinking orderbook.

Source: Hong Leong Investment Bank Research - 4 Nov 2015