• Overview. MMHE 1Q20 turned to core profit of RM2.9m from a core loss of RM33m in 1Q19 driven by higher workorder from Heavy Engineering unit (HEU) segment. On qoq basis, core profit declined by 84% on weaker marine business unit (MBU) segment.

• Key highlights. HEU revenue increased by 53% qoq and 81% yoy to RM226m as it completed the Golden Star FPSO External Turret fabrication jobs and kickstarted new projects secured in 4Q19 (i.e. Bekok WHP and Bergading MRU). It also secured a new umbrella contract with Carigali-PTTEPI (CPOC) for the provision of offshore brownfield modification works for 3 years until 2022.

• Against estimates: Below. 3MFY20 core profit of RM3m was below both our and consensus’ estimates at 3% and 5% respectively.

• Earnings forecast. We cut our FY20-22F earnings forecast by 59-62% (Table 5) as there is significant execution risk to existing work orders due to disruption in supply chain, which may prompt the company to secure from alternative resource at higher costs. There is also risk of further asset impairment as oil companies may defer its capex projects should this scenario of low oil price prolonged.

• Outlook. Its current orderbook stood at RM2.7bn (4Q19: RM2.9bn). Tenderbook rose to RM17bn from RM12.9bn in 4Q19 in which bulk of them coming from offshore windfarm and onshore module fabrication projects.

• Our call. Downgrade the stock to HOLD (from BUY) with lower SOPbased TP RM0.47 (from RM0.90) which implies 0.3x FY20F P/B (Table 6). We think its sizable orderbook and net cash balance of RM442m (as at 1Q20) or RM0.28/share, could provide stability while awaiting more work orders.

Source: BIMB Securities Research - 30 Apr 2020