MMHE’s  9M13  earnings  of  MYR135m  (-5%  y-o-y)  were  way  below estimates,  comprising  just  52%  and  56%  of  our  and  consensus forecasts  respectively.  The  results  were  largely  due  to  the  completion of  most  projects  in  hand.  We  are slashing  our  FY13F/14F/15F earnings by  21%/16%/14%,  mainly  to  account  for  the group’s weak  orderbook replenishment.  Owing  to  the  poor  earnings  visibility,  we  maintain  our NEUTRAL call and trim our FV to MYR3.80 (from MYR4.11).      

- A disappointing 3Q13. MMHE’s weak 3Q13 revenue of MYR449.7m (-43% q-o-q; -47% y-o-y) – its lowest since its IPO in October  2010 – was due  to  the  successful  loading  out  of  fabrication  works  for  ExxonMobil Exploration and Production and Sarawak Shell during the quarter under review. In tandem with the lower revenue, its 3Q13 EBIT fell 23% q-o-q (+47%  y-o-y)  while  EBIT  margin  improved  to  9%  (2Q13:  6.7%;  3Q12: 3.3%), boosted by healthy margins from its marine segment.      

- Poor  earnings  visibility.  We  estimate  that  MMHE’s  orderbook  of MYR2.5bn  would  hardly  be  sufficient  to  cover  its  annual  burn  rate  of c.MYR3bn.    Additional  contributions  from  variation  orders  in  projects  in hand are also unlikely to sustain the company’s earnings momentum, as most  of  the  projects  will  be  completed  by  year-end,  save  for  two  major contract  wins  this  year  from  Sabah  Shell  Petroleum  (TLP  Malikai deepwater  project)  and  Petronas’ Block  SK316.  Its  margins  may  also come  under  pressure  from  stiffening  competition  for  fabrication  jobs owing to the entry of established foreign players.

- 4Q13  potentially  weak  too.  MMHE  is  in  the  midst  of  finalising  several major  change  orders  to  offset  the  additional  costs  to  be  incurred  to complete its projects. Should these fail to materialise, the group’s 4Q13 earnings are likely to be severely affected.   

- NEUTRAL.  We  revise  downwards  our  FY13F/14F/15F  earnings  by 21%/16%/14%  on  incorporating  lower  order  replenishment  and  weaker project  margins.  This  pares  down  our  FV  to  MYR3.80  (from  MYR4.11), based on 22x FY14F EPS. We reiterate our NEUTRAL call in view of the lack of re-rating catalysts.

Source: RHB