Investment Highlights

• We maintain our BUY recommendation on Malaysia Marine and Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM1.13/share based on a 30% discount to its FY17 book value, underpinned by a rising momentum of offshore job prospects globally against a backdrop of improving oil price outlook.

• Our forecasts are maintained as MMHE registered an unsurprising 1QFY18 loss of RM25mil vs a RM17mil loss in 1QFY17 as revenue declined 20% due to a depleting order book. Note that our FY18F net profit of RM12mil is less than half of street’s estimate of RM29mil. No interim dividend was declared as expected.

• The 1QFY18 revenue contraction from less ongoing heavy engineering projects and fewer marine repair works reversed MMHE’s 4QFY17 net profit of RM48mil, which had benefited from a RM21mil positive tax charge supported by the group’s yard optimisation programme, together with the recognition of significant change orders in past projects.

• We reiterate our view that MMHE’s 1HFY18 results performance will be weak given that its yard utilisation remain below its breakeven of 50% as many of its previous projects, SK316, Bergading and Baronia central processing platforms (CPP), have already sailed away while substantive projects have yet to reach the stage of profit recognition. The Bokor CPP, which accounts for the bulk of the group’s order book, is presently at the engineering stage with only 10% progress completion as at 31 March 2018, 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 the bottom-line impact of lower revenue recognition in 1HFY18. While MMHE’s outstanding order book has slid 5% QoQ to RM1.2bil in the absence of large order intakes, the group has tendered for RM2.8bil jobs as at February this year, and eyes additional RM2.8bil prospects.

• MMHE together with Sapura Energy, China’s Offshore Oil Engineering Company, TechnipFMC, Hyundai Heavy Industries, Daewoo, Spain-based Dragados Offshore and JV between UK-listed Lamprell and Netherlands-based Boskalis are in the qualifying process to bid for 19 jackets required by Saudi Aramco’s multiple offshore fields with 2 awards worth US$400mil expected to materialise by mid-2018. The first tender involves 10 new offshore drilling jackets for the Safaniyah, Abu Safah and Marjan oilfields while the second covers 9 jackets for the Zuluf field.

• The stock currently trades at a compelling P/BV of 0.5x given the receding risk of further impairments amid brighter tendering prospects, together with attractive dividend yields of 4%.

Source: AmInvest Research - 4 May 2018