Period     2Q13/1H13

Actual vs. Expectations   MHB recorded a 2Q13 core net profit of RM47.6m which brought its core 1H13 net profit to RM98.1m. The results were broadly within our expectations, accounting for c.41.2% of our full-year forecast of RM237.9m. However, it was below market expectations, accounting for only 36.8% of the consensus full-year forecasted RM266.8m. 

Nevertheless, the 1H13 results were still within our expectations as we are expecting a stronger 2H13 performance on the back of variation orders for some previously completed projects  such as Gumusut-Kakap and Telok Gas.

Dividends    No dividend was declared in 2Q13.

Key Results Highlights   QoQ, the sequential net profit was down by 6.0% against 1QFY13 due mainly to lower offshore works executed within the quarter, resulting in lower revenue. Management guides that both the Gumusut-Kakap FPS and Telok-B topsides have been successfully delivered.

YoY, the core net profit was down by 26.5% largely due to lower margins recognised in 1H13 due to (i) higher  costs recognised at the Tapis EOR project; and (ii) the lack of EBIT recognised at the Malikai project which has yet to achieve profit recognition status (25% completion)  for the year.

Outlook    Overall, we are not surprised by the weaker results as (i) contract wins have been sluggish since mid-2012, resulting in a shrinking order book; and (ii) margins are still flat as MHB has just kick-started their cost rationalisation and efficiency enhancement exercise.

Order book currently stands at c.RM1.8b from RM2.5b in 1Q13 with the Malikai project being the largest with a contract value of RM1b.

Tender book stands at RM4.5b with the majority (c.50-75%) comprising domestic contracts. Management admitted that the contract-flows have been pretty slow lately and hints that some light could be seen by year-end.

We suspect competition will intensify with additional fabrication licences being dished out (i.e. Muhibbah and KKB Engineering) but MMHE is likely to maintain its edge in heavy-tonnage and complex projects given its track record and tie-up with global heavyweight Technip. 

MMHE currently targets to win an additional RM1.5b contracts vis-à-vis its previous RM3.0b target for FY13.

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

Rating  Maintain UNDERPERFORM.

Valuation     Maintaining our target price of RM3.39 based on an unchanged 18.0x PER on CY14 EPS.

Risks    i) Higher-than-expected project wins; ii) better-than expected margins; and iii) an acceleration in its project executions.

Source: Kenanga