Malaysia Marine and Heavy Engineering Holdings (MMHE)'s 9MFY12 results lagged our and consensus' expectations. The poorer-than-expected results were mainly due to provisions made for its FPSO Cendor project and corporate taxes relating to its Turkmenistan Phase 1 Project. We are retaining our NEUTRAL recommendation on the stock but are revising downward our fair value (FV) to RM4.76 following our earnings downgrade and ascribing a lower PE multiple of 22x vs 23x previously.
Below estimates. MMHE's 9MFY12 net profit fell short of our and consensus expectations, accounting for only 43.1% of our initial estimate and 34.1% of consensus numbers. Net profit dived 85.4% q-o-q and 50.8% y-o-y, mainly attributed to provisions arising from design changes and requirements, which we estimate at some RM50m-RM55m. These were related to the floating, production, storage and offloading vessel (FPSO) Cendor conversion project. Net profit was also weighed down by the 111.6% slide in total contributions from its share of profits from jointly controlled entities. We understand that the losses amounting to RM8.0m vs a profit of RM69.2m over the same period last year was attributable to a corporate tax of RM18m the company paid due to the termination of its Turkmenistan Phase 1 project.
Lowering FY12-FY13 earnings forecast. We understand from the management that it is currently negotiating with the client and hopes to claim back the bulk of the additional expenses arising from the changes in the FPSO job. Nonetheless, we are lowering our FY12 and FY13 earnings forecast by 38.0% and 6.5% respectively as the write-backs, if any, would probably only materialize in FY13.
RM2.3bn-strong orderbook as at Sept 2012. One of the notable projects MMHE secured recently is the RM160m Damar platform contract for ExxonMobil, which beefed up its orderbook to RM2.3bn as at Sept 2012. However, on a sequential basis, the group's orderbook actually shrank 18% q-o-q. That said, we understand from management that its tenderbook totals RM5bn and that it expects to replenish the company's orderbook 'very soon' after it finalizes the terms and conditions of a letter of award for the RM1bn Malikai tension leg platform contract which it was awarded recently. The management also guided that it expects to achieve mechanical completion of the Gumusut-Kakap floating production storage (FPS) semi-submersible project by next month and load-out in 1HFY13.
Maintain NEUTRAL. We are pegging the stock to a lower PE of 22x vs 23x due to the company's unexciting near term prospects. We are adjusting downward our FV to RM4.76 from RM5.32 before, on incorporating our earnings downgrade and lower PE.