Investment Highlights

• We maintain our HOLD recommendation on Malaysia Marine and Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM0.78/share based on a 50% discount to its FY17F book value given the group's potential losses and impairment provisions towards the end of the year.

• MMHE’s forecasts are maintained for now even though its 9MFY17 loss of RM14mil appears to be not as poor as our expectation, accounting for only 29% of our FY17F loss. However, the loss is already above street’s RM8mil. The group did not declare any interim dividend as expected due to the losses.

• The group’s 3QFY17 rebound to a net profit of RM16mil from a 2QFY17 loss stems from RM24mil lumpy recognition of change orders and finalization of completed Malikai and Gumusut-Kakap platform projects as well as Cendor FPSO conversion job, even though revenue declined 16% QoQ to RM215mil.

• As a comparison, MMHE recognized RM36mil of change orders in 2QFY17, which drove its revenue up by 9% QoQ, while still registering a loss of RM14mil.

• We understand that there may be above RM10mil of balance change order and contingency write-backs to be recognized from these completed projects. While a full recognition of these items may deliver a break-even 4QFY17 bottomline, we remain cautious of any potential impairment given the group’s declining order book.

• As the group did not secure any substantial orders over the past 3 months, MMHE's outstanding order book has dropped by 13% QoQ from RM1.6bil to RM1.4bil- 1.4x FY17F revenue.

• Excluding unrealized forex losses, MMHE’s 9MFY17 net profit plunged 82% YoY to RM7mil as its revenue decreased 20% YoY from insufficient projects reaching the group’s revenuerecognition progress threshold while the Malikai tension leg platform, F12 Kumang, Besar, Bergading and Baronia structures have been completed in 2QFY17.

• MMHE's yard utilisation is still expected to remain below 50% until 2Q2018 when the RM1bil Bokor central processing platform project, expected to be completed in 2Q2020, has reached steel cutting threshold.

• Given that the group does not account for any profit contribution until its projects have reached the completion stage of 50%, the Bokor job, which accounts for 63% of MMHE’s outstanding order book, is unlikely to significantly contribute to the group's weak FY17F-FY18F earnings prospects. Hence, the stock currently trades at a fair P/BV of 0.5x due to the likelihood of further losses against the backdrop of the upstream sector's slow project rollouts.

Source: AmInvest Research - 31 Oct 2017