MHB’s order book momentum far from exciting

by **Cals** Fri 08 Aug 2014, 03:06

Business & Markets 2014

Written by CIMB Research

Thursday, 07 August 2014 10:20

Malaysia Marine and Heavy Engineering Holdings Bhd
(Aug 6, RM3.46)
Downgrade to reduce with target price of RM3.25: The mood at MHB’s briefing on Aug 6 was cautious following the release of weak results for its first half ended June 30 of financial year 2014 (1HFY14), with net profit forming only 28% of our FY14 forecast and 32% of consensus’ forecast.

The negative surprise from the briefing was the staff mutual separation scheme (MSS), which ran counter to the vibrant outlook of the company’s fabrication peers.

We cut our FY14 to FY16 earnings per share for lower contract win assumptions, resulting in a lower target price — though we now value the stock at 23.4 times calendar year 2015 (CY15) price-earnings ratio (PER) (versus 22.5 times previously), a 40% premium over our revised implied target market PER of 16.7 times but still within the historical PER range for the oil and gas big caps. For exposure to fabrication, switch to TH Heavy Engineering Bhd.

MHB’s second quarter ended June 30 (2QFY14) net profit dropped 16% year-on-year (y-o-y), mostly due to: (i) the completion of the Cendor, Tapis and Kebabangan projects; (ii) delayed contributions from the Malikai and SK316 projects, whose first profits are expected to only come through in FY15 instead of FY14; and (iii) additional costs for the Cendor, Kebabangan and Gumusut-Kakap projects as management continued to pursue claims for change orders for several projects.

This led to a 24% y-o-y decline in 1HFY14 bottom line. At the briefing, management disclosed that it undertook an MSS in June 2014 for more than 100 employees at a cost of around RM10 million.

MHB’s order book momentum has been far from exciting. As at end-June 2014, its order book stood at RM1.82 billion, close to the record low of RM1.78 billion at end-December 2012.

Still, the MSS is a negative surprise as it suggests an even slower order book momentum in the coming quarters. — CIMB Research, Aug 6

[You must be registered and logged in to see this image.]

[size]

This article first appeared in The Edge Financial Daily, on August 7, 2014.[/size]