RESULTS

• 2Q18 core losses widened. 1H18 core losses of RM83m were behind our/consensus’ profit forecasts of RM22m/RM25m respectively. Despite offshore losses (with variation orders from RAPID currently being pursued), a stronger 2H18 on Bokor’s new contribution is expected. The negative surprise is again from marine repair - conversion costs were incurred for the sailaway of FSO Benchamas and FSO Bergading, but revenue recognition is pending approval by clients. Due to deferrals of dry docking (IMO regulations which complicated shortterm demand for shipping upgrades), only 3-4 tankers were dry docked in 1H18 (no LNG tankers).
• Orderbook backlog at RM1.1b as at Jun 18, cash balance improved from 1Q18. Roughly unchanged from RM1.2b qoq, orderbook includes the RM1b Bokor central processing platform (CPP) engineering, procurement, construction, installation and commissioning (EPCIC) job but excludes the RM550m call-out contracts for several Vestigo offshore facilities. Due to operating losses, higher capex of RM71m incurred for Dry Dock 3 (DD3) expansion (30% completed) and dividend payments, cash balance declined yoy to RM561m (2Q17: RM682m), but has rebounded from 1Q18’s RM514m due to better working capital management.
• 2H18 outlook. Management expects dry docking activities to recover for the marine repair, back to the normal run-rate. For offshore, it is bidding for RM4.3b of works (with RM2.7b more prospective bids in consideration), and is anticipating more contract awards from 4Q18. Some of the contracts in bid are the Pan Malaysia MCM, and the integrated plant turnaround maintenance contracts. MMHE has already secured contracts namely subsea works for Gumusut Kakap Phase 2 and a plant turnaround for a regasification terminal.

EARNINGS REVISION

• We cut 2018 forecast to a loss of RM45m, while profit forecasts for 2019-20 are adjusted lower to RM43m/RM71m. Noting that MMHE’s quarterly results will remain volatile, we still retain other assumptions such as: a) inputting ITA tax credits for 2018-20, and b) assuming all call-out contracts are converted to revenue. The adjustments in 2018 accounted for poor 1H18 conditions of marine repair, but as the effects were deemed as one-offs, the division should record EBIT from 2H18. We assume the said variation orders have a mild chance of being concluded within 2H18-2019. For instance, MMHE is pursuing cost recovery from EA Technique for FSO Bergading in these few months.

RECOMMENDATION

• Cut to SELL (from HOLD), with a lower target price of RM0.65 (from RM0.75). We peg MMHE to an unchanged 24x 2019F P/E, within its historical 5-year forward PE band. Although the worst may be over for both fabrication and marine repair (1H18), we are still concerned on the uncertainty if more cost provisions need to be incurred and when the variation orders can be concluded. At current price, the riskreward is not favourable, while its ability to pay dividends is now in question. For a rerating, the stock must have support of earnings recovery, and better visibility from shipping modifications and offshore contract newsflows (likely in end-2018) to replenish its orderbook.

Source: UOB Kay Hian Research - 2 Aug 2018