Period     3Q12/9M12

Actual vs. Expectations     The 3QFY12 net profit of RM8.1m brought 9MY12 net profit to RM141.6m. This was below both our (RM229.2m) and the consensus (RM306.8m) earnings, accounting for 47.0% and 46.2% respectively.

Dividends     No dividend was declared.

Key Results Highlights    QoQ, the revenue was down (-12.8%) due to normalised revenue recognised on the Kebabangan project in 3QFY12. 2QFY12 recognised six month's worth of revenue, as MMHE only started its accounting recognition only after the 25% completion milestone. Net profit meanwhile was down a whopping (-85.4%) due mainly to: 1) provisions for variation orders in regards FPSO Cendor project that led to losses of RM1.8m for the offshore division; and 2) provisions booked in for tax costs from MMHE's Turkmenistan operations (one of the JCEs).

YoY, despite the higher revenue (+81.8%), the net profit was down (-90%) again due to the same reasons mentioned above.

Outlook     Order book now stands at RM2.3b (from RM2.7b in June 2012). This is inclusive of the newly won Damar project worth RM160m.

We are negative on the short term prospects of MMHE as 1) the potential provisions on the FPSO Cendor project are still likely to continue; 2) the Kebabangan project does not seem to have significantly high profit margins and 3) the order intake, especially on the Turkmenistan front, continues to be sluggish.

The Malikai project is a likely win, but it will potentially have a lower-than-expected contribution as it would be executed via a JV (likely 50:50) with Technip.

The stock is also highly susceptible to a de-rating in the event of it being dropped from the FBMKLCI Index due to its current low ranking (~0.44%).

Change to Forecasts     We are trimming our FY12-13 earnings by 31.6% and 4.8% respectively on the back of lower EBIT margins for the offshore division given that the FPSO Cendor project could potentially see more provisions that could continue to 2013 (targeted completion date is 3QFY12).

Rating     MAINTAIN UNDERPERFORM

Valuation     Our target price has been reduced to RM4.02 based on a 18x targeted PER on our revised CY13 EPS of 22.3 sen.

Risks      Higher than expected project wins and an acceleration in its project executions.