Period

1Q15

Actual vs. Expectations

MMHE Holdings Bhd (MHB)’s 1Q15 core net profit came at RM36.0m, which is within our and market expectations, at 25.9% and 26.2% of fullyear forecast, respectively.

Dividends

No dividend was declared as expected.

Key Results Highlights

Core net profit in 1Q15 surged by 329.5% from RM8.4m to RM36.0m QoQ due to: (i) higher revenue contribution from both Offshore and Marine segment QoQ driven by higher project billing, and (ii) positive tax credit compared to RM22.3m tax expense in the preceding quarter which is seasonal as corresponding quarter last year also had similar tax credit. Notwithstanding, EBIT margins for the group declined (from 8.2% to 4.9%) QoQ due to higher project completion costs for the Offshore division.

In 1Q15, core net profit grew slightly higher by 4.0% YoY underpinned by stronger Offshore revenue due to higher progress billing from the ongoing SK316 project. However, EBIT contribution from the offshore division was lower due to higher completion costs of some existing projects. Marine revenue was 66.4% higher YoY due to higher vessel value of repair jobs for rigs, Floating Storage Unit (FSU) and etc.. However, EBIT margin was slightly lower at 9.3% in 1Q15 compared to 11.3% in 1Q14 as we reckon that it was due to repair jobs for bigger vessels that command lower margins.

Outlook

There are no major contract wins for the Offshore Fabrication division so far in 2015. Current ordrbook stands at RM1.1b consisting of mainly local jobs (SK316 & Malikai TLP).

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

Thus far, tender book stands at RM7. 0b, including potential international jobs but outlook remains fluid at this juncture, especially given the crude oil prices trend. The group’s prospects of securing major fabrication contract award look bleaker than before as oil majors look to cut their CAPEX in 2015.

We foresee pressures on its already low fabrication job margins as oil majors seek to cut costs in the midst of a more challenging O & G industry.

EPCC contract award for the Kasawari gas project which was originally scheduled to be awarded in Feb 2015 has been delayed without a certain deadline due to higher uncertainty in the oil prices. Being one of the three shortlisted players, this job is expected to provide a huge boost to the group’s dwindling orderbook.

For the Marine repair segment, we anticipate it to be more resilient compared to the Offshore division as the demand for dry docking repair and maintenance is expected to be less elastic to the changes in oil prices and industry outlook.

In 1Q15, the Marine division has also secured a repair and refurbishment contract from South Korea’s Pan Ocean for six VLOC vessels throughout 2015, giving more visibility to the smaller segment.

Change to Forecasts

We maintain our earnings forecast for now.

Rating

Maintain UNDERPERFORM

Valuation

Our TP is reduced slightly to RM1.00 from RM1.04 previously as we roll over our valuation to CY16 based on unchanged 12.0x PER, which is inline with big caps’ PER range at current oil price environment. Note that our FY16E EPS estimate of 8.3 sen suggests a 4.2% decline from 8.7 sen for FY15E.

Risks to Our Call

(i) higher-than-expected project wins, (ii) better-than expected margins, and (iii) acceleration in project executions.

Source: Kenanga Research - 28 Apr 2015