Malaysia Marine and Heavy Engineering Holdings Bhd
(April 28, RM1.25)
Maintain fully valued with target price of 90 sen: Excluding an unrealised foreign exchange gain of RM13.3 million, MHB reported a net profit of RM23 million for the first quarter ended March of financial year 2015 (1QFY15), which made up 25% of our estimate and 17% of consensus.
We consider results to be below expectations as upcoming quarters may be weaker as the current order book runs down.
As a result of higher additional costs to complete projects, MHB’s engineering, procurement and construction (EPC) margins shrank to 0.2% in 1Q.This was the main reason for the disappointing earnings. The marine division fared better with more vessel conversion and repair work contributing RM15 million (15% margin) in operating profit.
MHB’s latest order book stands at RM1.2 billion which is less than one times book-to-bill ratio and will be exhausted by 3QFY16. In fact, with two major jobs — SK316 and Malikai — at 61% and 77% completion already, earnings could take a drastic turn for the worse by late FY15.
There is downside risk to earnings as our current order book replenishment target of RM2 billion for FY15/FY16 may be too optimistic. The fabrication scene in Malaysia has become increasingly competitive as Petroliam Nasional Bhd now welcomes foreign competitors.
MHB’s contract wins from Malaysia are likely to shrink as the group takes on smaller projects and more subcontract roles. Furthermore, with low crude oil prices, many new projects are either being cancelled or postponed following cuts to capital expenditure by production companies. This will result in very sluggish contract flows over FY15.
We maintain our “fully valued” call with a target price of 90 sen based on 16 times FY15 forecast price-earnings ratio on the back of weak earnings visibility.
Risks include execution risks whereby competitive bids are pressuring profit margins and leave the group little room for error. Slight delays or hiccups could affect group profitability significantly.
The timing of new jobs may not coincide with completion of existing jobs. Therefore there could be exceptionally slow quarters ahead as the tension leg platform Malikai deepwater project and Block SK316 projects near completion. — Alliance DBS Research, April 28
This article first appeared in The Edge Financial Daily, on April 29, 2015.