Investment Highlights

• We have raised our recommendation on Malaysia Marine and Heavy Engineering Holdings (MMHE) to BUY from HOLD with a higher fair value of RM1.13/share (from an earlier RM0.78/share) by reducing the discount to its FY17 book value from 50% to 30% given the group's stronger-thanexpected performance and absence of any significant yearend impairment provisions.

• We acknowledge that MMHE’s 1HFY18 results performance will be weak given that its yard utilisation will drop below 50% in 2QFY18 from 53% currently. The Bokor central processing platform (CPP), which accounts for the bulk of the group’s order book, is presently at the engineering stage with only 6% progress completion, and will only reach steelcutting stage in 3QFY18.

• However, we understand that the group could still secure additional change orders this year from the finalisation of past contracts SK316, Bergading and Baronia, potentially cushioning bottom-line impact of the lower revenue recognition in 1HFY18. In addition to its order book backlog of RM1.3bil (-7% QoQ) as at 31 Dec 207, MMHE is tendering for RM4bil jobs, of which 80% stems from local projects.

• We understand that the MMHE/Technip JV is the front-runner for the RM2.2bil Pegaga CPP, which is to be deployed in block SK310 off Sarawak. As the operator Mubadala Petroleum is expected to reach final investment decision soon, the award could materialise in 2QFY18. Together with improved crude oil prices, which mitigate additional impairment concerns, we view that our earlier 50% valuation discount on book value as overly conservative.

• MMHE’s FY17 results exceeded expectations, recording a net profit of RM34mil vs. our loss estimate of RM49mil and street’s RM4mil. This stemmed largely from the recognition of RM100mil change order and a positive tax charge of RM21mil – 62% of net profit. The group declared an interim dividend of 3 sen, which was a positive surprise given our expectation of a FY17 loss.

• Hence, we have raised MMHE’s margin and positive tax charge assumptions that reversed FY18F loss of RM23mil to a net profit of RM12mil, and raised FY19F net profit by 2.7x to RM43mil.

• The group’s 4QFY17 net profit surged 2.9x QoQ to RM47mil from the RM21mil positive tax charge, driven by the group’s yard optimisation programme, together with change orders that drove revenue by 15% QoQ.

• The stock currently trades at a compelling P/BV of 0.5x given the receding risk of further impairments and significant operating losses, together with attractive dividend yields of 4%.

Source: AmInvest Research - 8 Feb 2018