Period  3Q13/9M13

Actual vs. Expectations MMHE Holdings (MHB) recorded a 3Q13 core net profit of RM36.4m which brought its 9M13 core net profit to RM134.6m. The 9M13 core earnings only made up 57% and 56% of our full-year estimates and market consensus, respectively.

 The lower-than-expected performance was mainly due to delay in project recognition. Nevertheless, we expect a stronger 4Q13 as several major change orders are currently in the midst of completion finalisation which will offset additional costs.

Dividends  No dividend was declared in 3Q13.

Key Results Highlights

 QoQ, the sequential net profit was down by 23.4% against 2Q13. The variance was mainly due to tailend profit recognition of some existing projects while it has yet to recognise profit from newer TLP project.

 YoY, the core net profit in 3Q13 rose >100.0% after the Offshore segment managed to turn around after an operating loss of RM1.8m in 3Q12. To recap, the operating loss in 3Q12 was caused by provisions for variation orders in regards to the FPSO Cendor project.

 YTD, the 9M13 net profit was down by 5.0% mainly due to: (i) yet to be recognised TLP project contribution; and (ii) higher cost of Tapis EOR project.

Outlook  Order book currently stands at RM1.5b with the Malikai project being the largest with a contract value of RM1.0b.

 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, but they expect the pace to pick up by year-end.

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

Change to Forecasts We are keeping our FY13-FY14 forecasts for now, pending a meeting with management for further clarity on its earnings prospects.

Rating Maintain UNDERPERFORM.

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

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

Source: Kenanga