Malaysia Marine And Heavy Engineering’s (MMHE) 1QFY13 net profit of MYR50.6m was below our and consensus’ estimates. Despite the higher revenue  (+38.6%  y-o-y,  +7.6%  q-o-q),  net  profit  sank  35.4%  y-o-y  and 49.6%  q-o-q  due  to  lower operating  profits  from  its  offshore  fabrication unit.  As  the  share  price  has  retraced  substantially  in  the  last  one  year, we  upgrade  the  stock  to  NEUTRAL  as  MMHE’s prospects  may  improve in FY14. Accordingly, we lift our FV from MYR3.24 to MYR3.70 pegged to 18x FY14 EPS from our previous 15x PER.  

-  Falling  short  on  estimates.  MMHE  registered  decent  revenue  growth (+38.6%  y-o-y,  +7.6%  q-o-q)  due  to  the  relatively  good  progress  in  its existing  projects  and  the  considerable  contribution  from  progress achieved  at  the  Malikai  Deepwater  tension  leg  platform.  Still,  the  group registered a weaker 1QFY13 net profit of MYR50.6m that came in below our  and consensus’  expectations,  accounting for  only  14.6%  and  17.6% of both full-year estimates respectively.

- Offshore  fabrication  division  the  earnings  drag.  While  revenue  from MMHE’s  offshore  fabrication  division  jumped  53.5%  y-o-y,  operating profits  were,  however,  45.9%  lower  y-o-y  as  profits  from  its  Malikai project have yet to be recognized as it was still at the early stages.  

- Marine  division  fared  well.  Meanwhile, the group’s  marine  division registered operating profits that were 59.4% higher y-o-y despite a 40.5% y-o-y  drop in  revenue.  The  weaker  revenue  was mainly  attributed  to  the lower number of vessels repaired - at 29 compared with 31 units - in the corresponding quarter. However, operating profits improved due to better pricing and an expansion in the scope of work from ship owners.

-  Lowering  our  forecasts.  Following  a  reallocation  of  our  coverage,  we took a closer look at our financial forecasts and made some changes. We are lowering our FY13 and FY14 revenue forecasts by 28.4% and 28.9% respectively while nudging down our FY13 and FY14 net profit forecasts by  24.6%  and  22.2%.  Our  revised  assumptions  are  premised  on  lower order wins of MYR1bn for FY13 and MYR2.5bn for FY14.

Source: RHB