Malaysia Marine and Heavy Engineering Holdings Bhd
(Feb 6, RM1.45)
Downgrade to sell from neutral with a reduced target price of RM1.19 from RM2.32: MHB’s full-year financial year 2014 (FY14) earnings declined by more than 45% year-on-year (y-o-y) to RM129.1 million. The full-year results were below our and consensus forecasts by a variance of more than 10%. Net margin continued to slide to only 4.8% compared with 8.2% a year earlier. This was due to stiffening competition from other foreign fabricators.  

Revenue from the offshore segment for the year declined by 5.9% y-o-y to RM2.4 billion while operating profit declined at a steeper pace by 47.5% to RM64.7 million. The company noted that this was due to lower revenue and operating profit from its ongoing projects which are at their tail end. In FY14, the company delivered a significant portion of its main earnings contributor projects — the FPSO Cendor, Tapis R topsides and Kebabangan topsides. In addition, higher operating expenses were incurred during the year.  

The marine segment did not fare well either. FY14 revenue declined by 14% y-o-y and operating profit by 53.4% y-o-y respectively. The company attributed the dismal performance to lower value vessels repaired, that is rigs and support vessels. We suspect this situation could also be due to the weak oil prices which have affected capital expenditure by oil producers.

The group’s current order book is approximately RM1.6 billion as at December 2014. The group is currently bidding for RM3 billion worth of jobs, the majority consisting of international engineering, procurement, construction, installation and commissioning  jobs. Given the weaker ringgit to the greenback, MHB will be more competitive in its international bids.

Due to the lacklustre results, we are revising our FY15 earnings downward by 27% to RM135.4 million. We are now assuming new job orders of only RM1.5 billion compared with RM2 billion previously. This is in line with management’s guidance that the order book is expected to reduce further in 2015 onwards. In addition, the weak crude oil price climate is expected to impact offshore fabricators margins.

Management noted that there will be no dividends this year. We believe cash conservation is crucial for the company in these trying times as FY14 cash decreased by 5.4% y-o-y to RM589 million. Given the weak earnings growth prospects, bleak offshore fabrication outlook and thinning profit margins, we are downgrading MHB to “sell” from “neutral” previously with a reduced target price of RM1.19 per share. Our target price is based on our revised mid-cap oil and gas service provider target price-earnings ratio of 14 times pegged to FY15 earnings per share of 8.5 sen. — MIDF Research, Feb 6

This article first appeared in The Edge Financial Daily, on February 9, 2015.