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 25% discount to its FY18F book value, underpinned by a rising momentum of offshore job prospects globally against a backdrop of improved oil price outlook.

• While MMHE’s FY19F-FY20F earnings are unchanged, we have reversed our earlier FY18F net profit of RM12mil to a loss of RM21mil on higher operating cost assumptions due to the weaker-than-expected 1HFY18 results. Note that our earlier FY18F net profit of RM12mil was already less than half of street’s estimate of RM25mil. No interim dividend was declared as expected.

• Excluding unrealised forex gains/loss and one-off provisions, MMHE registered a 1HFY18 core loss of RM83mil vs. a RM13mil loss in 1HFY17. Revenue declined 17% due to a depleting order book coupled with additional cost overruns from RAPID 5 package and the conversion jobs for floating storage offloading (FSO) vessels Benchamas 2 and Bergading, which are in the process of being negotiated and compensated by the clients.

• The 2QFY18 revenue increase rose 19% QoQ from the completion of FSOs Benchamas 2 and Bergading together with the Sepat wellhead platform topside and substructure.

• Recall that we have already highlighted that MMHE’s 1HFY18 performance will be weak as its yard utilisation remain well below its breakeven of 50% as many of its previous projects – SK316, Bergading and Baronia central processing platforms – 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 16% progress completion as at 30 June 2018, and with a slight lag from procurement, will only reach 25% by 4QFY18 for profit recognition.

• Together with the recognition of change orders potentially worth RM30mil from the cost overruns, we do not expect the low profit contribution from the initial phase of the Bokor CPP to reverse MMHE’s bottom line to the black by year-end.

• Notwithstanding the 6% QoQ contraction in MMHE’s outstanding order book to RM1.1bil in the absence of large order intakes, prospects are significantly improving with the group’s tenders surging by 54% QoQ to RM4.3bil (comprising 34% local and 66% foreign composition), excluding additional RM2.7bil potential projects.

• The stock currently trades at a compelling P/BV of 0.5x amid receding impairment risks and rising order flows.

Source: AmInvest Research - 2 Aug 2018