Period  1Q14

Actual vs. Expectations MMHE Holdings’ (MHB) 1Q14 core net profit of RM34.6m was below our and market expectations, making up around 14.0% of both our (RM248.9m) and consensus full-year (RM247.3m) estimates.

 The lower-than-expected performance is mainly due to lower revenue from Offshore segment as most of the projects in hand are nearing completion (such as Tapis EOR and Kebabangan) with relatively lower value of remaining progress billings and new projects, which are still at the early progress stage.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, the 1Q14 net profit was down by 26.2% from 4Q13 mainly due to: (i) lower revenue contribution from Offshore segment, (ii) higher-than-expected cost from one of the Offshore ongoing project, and (iii) higher cost from repair work performed in Marine segment.

 YoY, the core net profit contracted by 31.6% largely due to lower revenue contribution and higher-than-expected cost from Offshore segment as mentioned above.

Outlook  Orderbook currently stands at RM2.3b with the Malikai and SK316 projects being the largest contributors. Management guided that Malikai could reach profit recognition status by next quarter whilst SK316 by 4Q14.

 Tender book of RM4-5b comprises 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 Given the disappointing results, we are cutting our FY14 net profit by 14.7% to RM212.4m as we assume lower EBIT margin of 5% (from 6.5%) for the offshore division. Whilst the net profit forecast still seems bullish, we expect earnings to catch up once MMHE starts to recognise profit for Malikai and SK316 this year.

 We maintained our FY15 net profit forecasts for now, as we believe FY15 will showcase full-year contributions for Malikai and SK316; whilst 2H14 could see a slew of fabrication contracts being awarded.

Rating Downgraded to UNDERPERFORM

Valuation  We maintain our TP of RM3.60 based on an unchanged PER of 18x on FY15 EPS. Given that our fair value is still below the current share price, we have downgraded our call to an UNDERPERFORM.

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

Source: Kenanga