Malaysia Marine & Heavy Engineering (MMHE MK; HOLD; TP: MYR1.32): Inexpensive but challenging still

Malaysia Marine & Heavy Engineering (MMHE MK; HOLD; TP: MYR1.32): Inexpensive but challenging still

• What's New? 1Q14 core net profit of MYR25m (-31% QoQ, +2% YoY) equates to 18% of our full-year forecast, in line, considering the seasonality. The QoQ decline was largely due to lower EBIT contributions from its offshore division, which fell 87% to MYR1m in 1Q15. This was partially offset by stronger marine repair & conversion operations (revenue/EBIT: +23%/+15% to MYR106m/MYR15m). Headline net profit included net positive one-off of MYR11m: (i) net forex gain of MYR13m offset by (ii) impairment loss of MYR2m.
• What’s our view? Our forecasts are unchanged, with expectations of lower YoY earnings over the next 3 years. Maintain HOLD but cut TP to MYR1.32 (-18%) on lower 1.5x EV/order backlog peg (previously 2x).

Order backlog stood at MYR1.2b (-26% QoQ, -48% YoY) as at end-Mar 2015, this being 5 quarters of consecutive decline. Based on the current burn rate, these outstanding orders will be fully exhausted over the next 3 quarters, assuming no replenishment. Earning visibility is cloudy with a challenging outlook. Order book replenishment is a key concern for 2015. Securing new orders worth MYR1b in 2H15 will be the target for this year. The ability to do that could warrant a short-term re-rating of the stock, in our view.

While weak earnings and order book replenishment are the 2 key headwinds for 2015, these negatives are largely priced in, considering that the share price has fallen by 44% YTD (2014: -94%) and the stock currently trades at sub 1x book (0.7x) and -2SD below mean PER valuation too.