Malaysia. MMHE * Subdued outlook into Hold (unchanged) Results Review 22 February 2012

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1 PP16832/01/2013 (031128) Malaysia Results Review 22 February 2012 Hold (unchanged) Share price: Target price: RM5.51 Wong Chew Hann, CA (603) RM5.70 (unchanged) * Malaysia Marine and Heavy Engineering Holdings Stock Information Description: A leading heavy engineering and marine service provider with 3 core businesses: (i) engineering & construction, (ii) marine conversion and (iii) marine repair. Ticker: MMHE MK Shares Issued (m): 1,600.0 Market Cap (RM m): 8, mth Avg Daily Volume (m): 0.99 KLCI: 1, Free float (%): Major Shareholders: % MISC Bhd 66.5 Technip SA 8.4 Key Indicators Net cash / (debt) (RM m): 2,085.6 NTA/shr (RM): 1.51 Net Gearing : (0.9) Historical Chart Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Performance: 52-week High/Low RM8.82/RM5 MMHE MK Equity 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 2.0 (6.5) (20.1) (15.1) (2.7) Relative (%) (0.7) (15.1) (22.8) (17.6) (4.8) MMHE * Subdued outlook into 2012 Poor quarter, yard space bottleneck a deterrent. As forewarned, results missed our forecast on a weaker QoQ performance, leading us to cut 2012 net profit forecast by 16%. Overall, MMHE is unlikely to outperform its peers this year. The current yard space bottleneck is a short-term constraint to taking on more jobs, for new space from Sime Darby s Pasir Gudang yard will only be freed up in For this reason, MMHE remains a Hold with a RM5.70 TP (20x 2013 EPS). Results were below expectations, as previewed. 3QFY11 (Oct-Dec 2011) net profit of RM46m (-42% QoQ, -65% YoY) took full-fy 9M11 (Apr-Dec 2011) earnings to RM206m (-36% YoY), which accounted for 74% of our forecast. The underlying QoQ weakness was largely due to: (i) timing differences in job recognition, (ii) job delays (i.e. Gumusut- Kakap), and (iii) marginal contribution from its jointly-controlled Turkmenistan operations (RM1m in 3Q vs. RM15m in 2Q). Recent job wins (i.e. Tapis, Teluk Gas) have yet to reach the 25% billing milestone. Cutting 2012 earnings. We lower our 2012 net profit forecast by 16% following: (i) a 24% downward revision in revenue, (ii) a 1.1-ppt increase in engineering & construction (E&C) EBIT margin assumptions. Our 2013 forecast is unchanged. MMHE s outstanding order book of RM3.1b as at Dec 2011 (-16% QoQ), anchored by the Tapis EOR (RM1.2b), FPSO Cendor (RM734m) and Gumusut-Kakap (RM456m) projects, offers 22-month visibility. Based on the respective completion dates, yard space is tight for new projects in 1H12. Completion of Sime Darby s yard acquisition delayed to 2Q12. We understand this partly relates to the delay in rollout of ONGC s B-193 job (from its scheduled Mar deadline). MMHE is still evaluating the possible novation of Sime s RM1.15b Kebabangan job. The job, currently at 15% completion, will occupy much of the yard space up to end-2013 (or early 2014). This is a big deterrent to MMHE s bid for new jobs for this yard. Assuming the Kebabangan project remains at Sime Darby, our back-of-the-envelope calculation suggests that MMHE would only recognise RM15m-RM20m p.a. in rental profits, on a 5% yield. MMHE Summary Earnings Table Source: Maybank IB; * annualized FYE Dec (RM m) Turnover Mar 2010A Mar 2011A Apr-Dec 11 6, , , F 3, F 3,949.1 EBITDA Recurring Net Profit Recurring EPS (sen) EPS growth (%) (54.4) DPS (sen) PER * EV/EBITDA * Div Yield (%) * P/BV Net Gearing (%) cash cash cash cash cash ROE (%) ROA (%) Book Value (RM) Change in net profit (%) (15.7) - Consensus Net Profit - - na Kim Eng Hong Kong is a sub sid iary of Malayan B anking B erh ad SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

2 Summary Results Table Quarterly results Cumulative FY Dec (RM m) Sep-Dec 11 Sep-Dec 10 % YoY Jul-Sep 11 % QoQ Apr-Dec 11 Apr-Dec 10 % YoY Turnover ,316.4 (45.6) , ,512.1 (39.2) EBIT (52.9) 84.9 (37.7) (34.0) Int. expense 0.0 (0.0) nm 0.0 nm 0.0 (0.8) nm Associates (92.6) nm Pretax profit (52.3) (46.1) (19.1) Tax (7.7) 20.4 nm (20.1) (61.9) (44.9) 12.0 nm Minority interest (0.1) 0.5 nm) 0.0 nm (0.3) 0.1 nm) Net profit (65.4) 80.2 (42.2) (36.2) Net profit Ex EI (65.4) 80.2 (42.2) (36.2) EBIT margin (%) (1.1) 18.3 (11.0) Tax rate (%) 14.2 (18.0) (5.9) 17.9 (3.9) 21.8 Sep-Dec 11 Sep-Dec 10 % YoY Jul-Sep 11 % QoQ Apr-Dec 11 Apr-Dec 10 % YoY Turnover breakdown ,316.4 (45.6) , ,512.1 (39.2) - Marine repair & Conversion Engineering & Construction ,269.2 (53.2) , ,272.0 (43.8) - Others & Elimination (97.0) 0.3 (89.0) (43.5) EBIT (52.9) 84.9 (37.7) (34.0) - Marine repair & Conversion (54.9) - Engineering & Construction (68.4) 72.0 (53.9) (27.9) - Others & Elimination (28.7) 6.5 (43.3) (34.0) Margins (%) - Marine repair & Conversion (16.7) - Engineering & Construction (2.7) 19.0 (13.4) Sources: Company, Maybank IB Other corporate developments. For 9M11, MMHE only invested RM77m in capex for yard optimisation. It has completed the auto blast and priming workshop job. Ongoing projects include the (i) 25k MT skid track, (ii) bulkhead, (iii) quay wall, (iv) infrastructure work at Idemitsu land, and (v) dredging works at Quay 6. We forecast MMHE s tax rate to be 18% for Tax rates could be lower should the Sime Darby yard qualify for the Investment Tax Allowance (ITA). Shareholding update. Foreign shareholding has contracted by 0.95% from 6.33% in Sep 2011 to 5.38% as at Dec 11, while domestic GLIC stakes remain relatively unchanged, at 10.53%. Technip S.A. has raised its stake to 8.43% as at Feb 2012 (+0.43-ppt). Technically, Technip could lift its shareholding in MMHE a little further but not cross the 10% level, in order for any business transactions or working relationship between MMHE and Technip to fall outside the ambit of a related party transaction classification. Order backlog and foreign shareholding level Quarterly movement Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 - Outstanding orderbook (RM m) 3, , , , , , Foreign shareholding (%) Technip S.A (%) Sources: Company, Maybank IB 22 February 2012 Page 2 of 6

3 Peer comparison (Calendarised) Company Mkt Cap PER EV/EBITDA P/BV Net gearing/ (cash) (RM m) (RM m) MMHE 8, (2,085.6) Sembcorp Marine * 10, (2,907.1) Keppel Corp * 19, ,279.3 Kencana Petroleum 6, (203.4) Simple average Ex-MMHE Sources: Company, Maybank-IB, *SGD, ** annualized MMHE PE MMHE P/ BV sd: Mean: Mean: sd: Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan February 2012 Page 3 of 6

4 INCOME STATEMENT (RM m) BALANCE SHEET (RM m) FY Dec Mar 2011A Apr-Dec F 2013F FY Dec Mar 2011A Apr-Dec F 2013F Revenue 4, , , ,949.1 Net Fixed Assets 1, , ,012.1 Cost of goods sold (3,866.6) (1,863.5) (2,812.5) (3,293.6) Invts in Assocs & JVs Gross profit Other LT Assets Other ope. (exp)/ Inc. (169.3) (69.4) (132.2) (111.0) Cash & ST Invts 1, , , ,351.5 EBIT Other Current Assets 2, , , ,119.6 Net int (exp)/ Inc (0.8) Total Assets 4, , , ,614.5 Associates & JV Exceptional gain/ (loss) (0.0) ST Debt Pretax profit Other Current Liab 2, , , ,645.1 Tax 26.5 (44.9) (68.5) (98.0) LT Debt Minority interest 0.3 (0.3) Other LT Liab Net profit Shareholders Equity 2, , , ,939.0 Net profit ex EI Minority Interest Total Cap. & Liab 4, , , ,614.5 EBITDA Sales Gth (%) (27.8) (51.8) Share Capital (m shares) 1, , , ,600.0 EBITDA Gth (%) 6.6 (46.1) Net Debt/(Cash) (1,448.1) (2,085.6) (3,254.4) (3,351.5) EBIT Gth (%) 5.0 (48.9) Working Capital 1, , , ,826.0 Effective Tax Rate (%) (6.2) Gross Gearing % CASH FLOW (RM m) RATES & RATIOS FY Dec Mar 2011A Apr-Dec F 2013F FY Dec Mar 2011A Apr-Dec F 2013F Net Profit Gross Margin (%) Dep. & amort EBITDA Margin (%) Chg. In wkg cap EBIT Margin (%) Other ope. CF (625.4) (65.4) (4.6) 0.0 Net Profit Margin (%) Operating CF (49.3) ROAE (%) Net capex (143.2) (95.4) (500.0) ROA (%) Chg in LT inv ROCE (%) Chg in oth assets (143.2) (95.4) (500.0) Div Payout Ratio (%) Investment CF (114.8) (21.4) (500.0) Interest Cover nm nm nm Net chg in debt (305.5) Debtors Turn (days) Chg in other LT liab. 1,151.9 (60.0) (120.0) (120.0) Creditors Turn (days) Oth. Financing CF Inventory Turn (days) Financing cash flow (60.0) (120.0) (120.0) Current Ratio Net cash flow , Quick Ratio Net Debt/Equity cash cash cash cash Capex to Debt (%) nm nm nm nm N.Cash/(Debt)PS (sen) Opg CFPS (sen) (8.7) Free CFPS (sen) (12.0) Sources: Company, Maybank-IB 22 February 2012 Page 4 of 6

5 APPENDIX 1 Definition of Ratings Maybank Investment Bank Research uses the following rating system: BUY Total return is expected to be above 15% in the next 12 months HOLD Total return is expected to be between -15% to 15% in the next 12 months SELL Total return is expected to be below -15% in the next 12 months Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies. Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Berhad and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank B erhad, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on thes e forwardlooking statements. Maybank Investment Bank Berhad expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrenc e of unanticipated events. This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written cons ent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. 22 February 2012 Page 5 of 6

6 APPENDIX 1 Additional Disclaimer (for purpose of distribution in Singapore) This report has been produced as of the date hereof and the information herein maybe subject to change. Kim Eng Research Pte Ltd ("KERPL") in Singapore has no obligation to update such information for any recipient. Recipients of this report are to contact KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. As of 22 February 2012, KERPL does not have an interest in the said company/companies. Additional Disclaimer (for purpose of distribution in the United States) This research report prepared by Maybank Investment Bank Berhad is distributed in the United States ( US ) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Kim Eng Securities USA, a brokerdealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Kim Eng Securities USA in the US shall be borne by Kim Eng. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. This report is not directed at you if Kim En g Securities is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Kim Eng Securities is permitted to provide research material concerning investments to you under relevant legislation and regulations. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply if the reader is receiving or accessing this report in or from other than Malaysia. As of 22 February 2012, Maybank Investment Bank Berhad and the covering analyst do not have any interest in any companies recommended in this Market themes report. Analyst Certification: The views expressed in this research report accurately reflect the analyst's personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. Additional Disclaimer (for purpose of distribution in the United Kingdom) This document is being distributed by Kim Eng Securities Limited, which is authorised and regulated by the Financial Services Auth ority and is for Informational Purposes only.this document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers. Published / Printed by Maybank Investment Bank Berhad (15938-H) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, Kuala Lumpur Tel: (603) ; Fax: (603) Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof Kuala Lumpur Tel: (603) ; Fax: (603) February 2012 Page 6 of 6