Results

• Within Expectation: 6MFY16 core PATAMI stood at RM41m, making up 52.6% and 49.8% of our earnings and consensus estimates

Deviations

• None

Highlights

• 2QFY16 revenue dipped 48.9% YoY as its major projects (Malikai & Besar) come to completion. In the quarter under review, the group recognized revenue mainly from F12 and Baronia. Meanwhile, marine business suffered a dip due to lower work value and lesser conversion projects.

• Mailkai TLP project underwent sailaway in 11th July 2016. NMB Bergading project was also successfully sailaway in Jun 2016. At this juncture, projects running on the yard are (i) Besar-A Jacket & Topside (88% completed) (ii) Baronia CPP Jacket (52% completed) and (iii) Petronas FLNG-2 Turret (56% completed). These projects are scheduled to be completed in 1H17, leaving a potential revenue gap from then onwards.

• The company is pursuing variation orders claims for Tapis and Malikai projects. We have not factored in any variation orders in our earnings forecasts. Any successful claim will help to boost earnings.

• Latest orderbook stood at RM1.0bn, similar to the level seen in the preceding quarter with majority of backlog comprising of RAPID works. The group submitted RM1.8b worth of tenders in 2016 (of which 90% local jobs) out of total RM7.4bn in potential tenders for year 2016-2017.

• Focus would still be directed to RAPID prefabrication contracts or HUC contracts which would be in smaller quantities (RM200- 300m each) in view of challenging upstream outlook.

• We believe the ability to secure local fabrication projects would be key positive catalyst i.e. Baram Delta Wellhead Platform & CPP packages rumoured to be awarded later this year. It is believed that MHB and SKPETRO are in the final contender for the CPP package. Winning of this contract could lift the market sentiment on the group and the earnings impact would only be felt earliest in 2H17.

• The group’s Marine divis ion is expected to remain bus y albeit less so for 2016 (due to higher base created by strong demand for MISC LNG vessels) for the rest of the year with resilient demand for marine maintenance. MHB is also contemplating addition of 3rd dry dock to expansion its strong-performing Marine division.

Risks

• Project execution risk and Orderbook replenishment risk.

Forecasts

• Earnings estimates maintained.

Rating

• SELL

• Positives – Room to enhance yard capacity and capability. Net cash balance sheet.

• Negatives – History of delivery delays and earnings disappointments. High contract replenishment risk due to oil price slump.

Valuation

• Maintained Sell with unchanged TP at RM0.94 based on 0.6x BV. While earnings are holding up well, we believe 2016 contract replenishment remains a risk to its 2017 earnings outlook.

Source: Hong Leong Investment Bank Research - 2 Aug 2016