Period  4Q14/FY14

Actual vs. Expectations  MMHE Holdings Bhd (MHB)’s 4Q14 core net profit of RM8.4m led to core FY14 net profit of RM97.6m. This is 8.8% and 39.9% below our full-year forecast (RM107.0m) and consensus (RM162.5) estimates respectively. Our FY14 core net profit excludes: (i) RM19.3m tax incentive credit, (ii) a one-off RM10m Mandatory Separation Scheme (MSS) expenses in 2Q14, and (iii) RM23.0m unrealised FOREX gain.

 The weaker-than-expected performance was mainly due to lower-thanexpected profit contribution from the Offshore Business Unit whereby we had overestimated earnings from some projects that are yet to be completed (majority of its projects have their profits back loaded).

Dividends  No dividend was declared as expected.

Key Results Highlights  Core net profit in 4Q14 plunged by 56.2% QoQ largely due to lower QoQ Offshore revenue (-16.7%) on lesser works completed in the quarter and lower Offshore operating margin (4Q14: 1.2% vs 3Q14: 2.2%) due to timing differences of profit recognition on its projects.

 YoY, core net profit in 4Q14 was weakened by 82.1% YoY underpinned by lower Offshore revenue on lesser project billings and operating margins (4Q14:1.2% vs. 4Q13: 1.7%).

 Full-year 2014 core net profit declined 46.2% YoY as performances in both Offshore (due to lesser works done) and Marine (due to lower value per vessel serviced in the absence of special projects in contrast to 2013) divisions were weaker compared to the corresponding period. Operating margin for Marine division was significantly lower at 11.3% in FY14 compared to 24.7% in the previous year.

Outlook  There are no contract wins by the group so far in 2015.

 Profit contribution for most of the OBU projects is guided to emerge only by 2H15 and 2016.

 Thus far, tender book is still at RM3.0b but outlook remains fluid at this juncture, especially given the crude oil price trend. The group’s prospects of securing major fabrication contract award looks bleaker than before as oil majors look to cut their CAPEX in 2015.

 One major EPCC tender to look out for would be the Kasawari gas project expected to be awarded in mid-Feb this year. Partnering with Technip, the group is one of the 3 shortlisted players tendering for the project.

 Order book stands at RM1.6b with its yard occupied for the next two years.

Change to Forecasts  We cut our FY15E net profit by 24.4% to RM139.0m by reducing our 2015 orderbook replenishment assumption from RM2.0b previously to RM1.5b in view of weaker crude oil prices which is inducing further deferment of EPCC contract awards.

 In addition to that, we also introduced our FY16E net profit of RM133.2m based on contract replenishment assumption of RM1.5b with profit recognition of the contracts back loaded towards the tail-end of project life.

 We have also reduced our NDPS assumptions for FY15 to nil from 5.0 sen previously in view of challenging business condition in the near-term for the group. No dividends are forecasted for FY16.

Rating Maintain UNDERPERFORM

Valuation  As a result of earnings cut, our TP is reduced by 24.6% from RM1.38 previously to RM1.04 based on 12.0x FY15E PER, which is in line with the sector average under the current crude oil price environment.

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

Source: Kenanga