MMHE’s 1H13 net profit of MYR98.1m was below expectations, reaching just  37.6%  and  36.8%  of  our  and  consensus  estimates  respectively. Margins contracted due to higher costs arising from its Tapis enhanced oil  recovery  (EOR)  project.  Despite  the  weaker  results,  we  believe  that its  transformation  initiatives  are  now  bearing  fruit.  We  lift  our  FV  to MYR4.11 (from MYR3.70) but maintain our Neutral call on the stock.  

- Weaker sequential revenue but slightly better y-o-y. Malaysia Marine And  Heavy  Engineering  (MMHE)  registered  weaker  sequential  revenue growth  (-14.7%  q-o-q)  due  to  lower  contribution  from  its  offshore business unit. However, on a y-o-y comparison, its revenue grew 4.8%, boosted  by  contributions  from  newer  projects  such  as  Damar  and  the F14/F29 module.  

- Profitability down. Despite the slight improvement in revenue y-o-y, net profit  dipped  26.5%  y-o-y  due  to  weaker  operating  margins  from  its offshore  business  unit  (operating  margin:  1H13:  4.6%  vs  1H12:  7.7%), which  could  not  be  mitigated  by  the  better  operating  margins  from  its marine business unit (operating margin: 1H13: 22.3% vs 1H12: 15.6%).

- Getting better. We noticed that MMHE’s transformation initiaties have started  to  bear  fruit,  as  evidenced  by  improvements  in  the  operating margins  at  its  marine  business  unit,  although  there  is  still  room  for improvement as  the  group  failed  to  achieve similar  gains  at  its  offshore business unit.  

- More  to  come  in  2H13.  We  retain  our  net  profit  forecast  for  now  as 2H13 may be better for MMHE given that there is a chance that it might be able to recognise revenue from its Malikai project. Also, management has  guided  that  it  could  potentially  secure  up  to  MYR1bn  worth  of projects later this year despite having tendered for jobs worth MYR4.5bn.

- Maintain NEUTRAL. With its transformation initiatives beginning to yield results,  as  evidenced  by  the  improvements  in  quarterly  operating margins,  we  raise  our  target P/E  to  20x  (from  18x)  -  below  its  historical average of 22x - which we deem fair.

Source: RHB