Malaysia Marine & Heavy Engineering - Rebuilding earnings prospects HOLD

We maintain our HOLD recommendation on Malaysia Marine & Heavy Engineering Holdings (MMHE), with a lower fair value of RM4.40/share (vs. an earlier RM4.60/share) based on an FY13F PE of 22x - at parity to Kencana Petroleum's peak of 22x in 2007.

- We have cut our FY13F-FY14F earnings by 13%-14% on lower order assumptions of RM3bil-RM4bil vs. RM4bil-RM5bil previously. We also introduce FY15F net profit with a growth of 7% on a flat new order assumption of RM4bil, with expectations of a gradual improvement in productivity.

- There may be a slight upside bias from potential write-backs to our FY13F earnings, as MMHE is negotiating to claim back the bulk of the additional variation order expenses, which we estimate is around RM50mil, caused by design changes in the FPSO Cendor conversion job.

- MMHE's FY12 pretax profit of RM218mil was within our expectations, coming in 5% below our earlier FY12F estimate of RM230mil but below consensus at 19% below the street's RM270mil. 

- But the group benefited from a positive 4QFY12 tax charge of RM41mil (arising from the acquisition of the Sime Darby Engineering yard), which resulted in FY12 net profit coming in 22% above our earlier forecast and 9% above the street's. MMHE declared a higher-than-expected final DPS of 10 sen -above the street's 7 sen.

- MMHE's 4QFY12 pretax profit rebounded to RM60mil from RM10mil in 3QFY12 due to the absence of additional expenses, estimated at RM50mil, from the FPSO Cendor conversion design changes. This was partly offset by the absence of a reversal of RM16mil provision in 3QFY13 from earlier rig repair works under the Marine division. 

- With the recently awarded US$775mil (RM2.3bil) Malikai tension leg platform fabrication contract in the bag for the Technip-MMHE joint-venture, the group's net order book has brightened from RM2.3bil in 3QFY12 to RM2.9bil currently - 0.9x FY13F revenue. The group is currently tendering for up to RM5bil projects, half of which includes overseas jobs in which the chances of success are uncertain.

- The stock currently trades at an unexciting FY13F PE of 21x - at a 17% premium above the average of 18x for oil & gas stocks with market capitalisation of over RM1bil. For exposure to this sector, we prefer SapuraKencana Petroleum, which has an order book of over RM10bil and a consistent earnings delivery record.