Period     1Q13/3M13

Actual vs. Expectations     The 1QFY12 core net profit of RM50.6m was largely within our expectations, accounting for c.21% of our full-year forecast (RM237.9M). However, it was below the consensus expectations, accounting for only 18% of the consensus fullyear forecast (RM286.0m). 

We considered the 1QFY13 as within expectations as  we expect a stronger 2HFY13 performance on the back of some variation orders for the various projects that had  been previously completed (i.e. Gumusut-Kakap and Telok Gas).

Dividends    No dividend was declared as expected.

Key Results Highlights    QoQ, the sequential net profit was down by 13.5% from the core net profit in 4QFY12 mainly due to a mismatch of recognition between the revenue and profit for the  TLP Malikai project. For 1QFY13, while there was some revenue recognised for the TLP Malikai design phase, there was no corresponding EBIT recognised as the group will only start to recognise profit when the entire project achieved a 25% completion stage (expected soonest by 4QFY13). This has resulted in a lower margin of 4.2% for the offshore business unit (versus the 7.0% in 4QFY12).

YoY, the core net profit was down by 35.4% largely due to: 1) the lower margins from all its newer projects vis-à-vis the projects performed in 1QFY12 (i.e. the Kinabalu project) and 2) the lack of EBIT recognised at the Malikai project. 

Outlook    Overall, we are not surprised by the weaker results in the current year as we had mentioned in our previous report that it is going to be tough for MMHE as it was likely to see sluggish contract wins and a flat margin growth for FY13. 

The total order book currently stands at c.RM2.5b (as at Dec-12, it was RM3.0b). 

Fabrication contract awards seemed to have been delayed and this could likely emerge only by end-14 at the earliest. As such, MMHE currently targets to win only RM1.5b contracts vis-à-vis its previous RM3.0b target for FY13.

Its cost rationalisation and efficiency enhancement exercises are unlikely to reap significant results in the coming year as the restructuring will take time. In addition, any new longterm agreements will only impact the fabrication contracts won after the Malikai TLP project, which is also projected to be late.

Change to Forecasts    No changes to our FY13 forecasts given that the earnings are largely within expectations. 

We have fine-tuned our earnings estimates to include the TLP Malikai project in the consolidated earnings (versus the previous treatment as JV earnings) upon guidance by management. However, there are no changes to our FY14 earnings. 

Rating  Maintain UNDERPERFORM.

Valuation     Maintaining our target price of RM3.39 based on an project executions.

Risks    Higher than expected project wins and an acceleration in its unchanged 18.0x PER on CY14 EPS.

Source: Kenanga