Period  4Q13/FY13

Actual vs. Expectations  MMHE Holdings’ (MHB) 4Q13 core net profit of RM46.9m brought its FY13 core net profit to RM181.5m; which only made up 76.3% and 87.4% of our (RM237.9m) and consensus full-year (RM207.7m) estimates, respectively. Our core net profit estimate excludes the tax incentive of RM55.1m.

 We believe the lower-than-expected performance is mainly due to execution delays for projects like Tapis-R and Kebabangan projects and delayed profit recognition for the Malikai project which has yet to achieve the 25%-milestone.

Dividends  A DPS of 5 sen has been announced for this year; lower than our expected 10 sen assumption and that paid in 2012.

Key Results Highlights QoQ, the core net profit was up by 14.8% against 3Q13 mainly due to higher revenue for the quarter as the offshore business unit (OBU) booked in some variation orders and higher other operating profit.

 However, YoY, the core net profit in 4Q13 contracted by 13.7% as OBU projects in-hand were nearing completion with decreasing value of progress claims remaining. Whilst margins were also eroded on a relative basis due to higherthan-expected costs for ongoing projects and zero profit recognition from the Malikai project despite the recognition in revenue.

Outlook  Orderbook currently stands at RM2.6b with the Malikai and SK316 projects being the largest contributors. The Tapis-R; FPSO Cendor and Kebabangan contracts are expected to be loaded-out by 2H14.

 Tender book of RM4-5b involves both an equal split of domestic and international contracts.

 Management believes that contract award flows would be similar to that of 2013; which is a slight disappointment to us. However, they did guide that it is still early days, hence tenders could pick up along the year.

 Management also guided that future contracts seem to be increasingly on EPCC basis, hence wins via partnership basis could rise.

Change to Forecasts We have downgraded our FY14 net profit by 17.4% to RM247.6m (from RM301.4m) as we assume lower revenue recognition for new wins (only 50% of RM3bn wins within the year (versus 75% previously) over the bulk of this year’s order book.

 We introduced FY15E net profit of RM320.1m which includes RM3b of new project revenue on top of the remaining work for Malikai and SK316 (expected to be c.RM700m outstanding).

Rating Maintain UNDERPERFORM.

Valuation  We roll-forward our target price base to FY15 as we believe that investors are now looking at longer-term visibility when picking oil and gas stocks. At an unchanged PER of 18x our target price for the stock is RM3.60 (versus RM3.39 previously). Given that our fair value is still below current share price, we continue to advocate an UNDERPERFORM call.

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

Source: Kenanga