KUCHING: More contract flow is required to beef up Malaysia Marine and Heavy Engineering Bhd’s (MMHE) financial year 2014 (FY14) and FY15 earnings amid another disappointing quarter.
This led to the first half of FY13 (1HFY13) results making up only 34 per cent and 36 per cent of Alliance Research Sdn Bhd’s (Alliance Research) and consensus full year estimates, respectively.
According to Alliance Research, second quarter of FY13 (2QFY13) earnings were dragged down by higher than expected expenses relating to the Tapis enhanced oil recovery (EOR) project and later than expected profit recognition for the Malikai tension-leg platform (TLP) project.
MMHE’s latest outstanding orderbook stands at RM1.8 billion of which over 50 per cent consists of the MMHE’s portion of the Malikai TLP project.
Tapis EOR and Kebabangan Northern Hub projects take up another estimated 30 per cent of orderbook and the remainder for smaller projects closing completion.
To note, the Gemusut-Kakap project has finally sailed away during the quarter, freeing up yard space for the group and as such Alliance Research estimated the latest yard utilisation at only 50 per cent.
“While orderbook is sufficient to take the group comfortably through FY13, we opine that more contract flow is required to beef up FY14 and FY15 earnings,” the research house commented.
Only the Malikai project will be extended into FY14 and FY15 while everything else in the group’s orderbook will be completed by year end.
“We see risk to forward earnings as new contract flow has been slow across the industry. Latest group tenderbook stands at roughly RM4.5 billion with the largest project in the tenderbook at RM2 billion,” Alliance Research highlighted.
The group hopes to secure up to RM1 billion in new projects by year end, but will require RM2 to RM3 billion more for sustained earnings and growth in FY14 and FY15.
“As such, we lower our FY13 estimates by 20 per cent as we cut our gross margins from 11 per cent to nine per cent for the year.
“This captures cost overruns as well as only small profit contribution from Malikai this year,” the research arm said.
While there are many project tenders currently in the market, delays in awards and stiff competition may prevent MMHE from fully capitalising on contract flow.
“Hence, for FY14 and FY15, we lower our estimates by 17.9 per cent and 17.5 per cent respectively as we take RM500 million out of our RM3 billion orderbook replenishment assumptions.
“We also keep conservative on margins, lowering gross margins from 11 per cent to 9.5 per cent for both years to allow for potential cost overruns or lower margins due to competitive bidding.
“Given our cut to earning, our target price for MMHE is lowered to RM3.34 per share from RM4.06 per share previously and our ‘neutral’ recommendation is subsequently downgraded to ‘sell’,” Alliance Research reiterated.