Overview. MMHE’s 3Q21 core loss narrowed to RM20m in (2Q21 LAT: RM27m) driven by higher revenue from heavy engineering (HEU) segment. HEU revenue grew by 44% to RM331m. This had offset the decline in marine repair business (MBU) revenue which was dragged by prolonged border restriction.

Key highlights. Following the sail-away of Bekok structures in Jul/Aug 2021, the company was left with two major fabrication projects at the yard (i.e. Kasawari and Jerun EPCIC). Currently, it still has a healthy orderbook amounted to RM2.5bn (2Q21: RM2.7bn) and large outstanding tenderbook of more than RM9bn.

Against estimates: Below. 9MFY21 core loss of RM153m (against RM9m profit in 9MFY20) was below our expectation. This stems mainly from (i) cost impact of Covid-19, (ii) weak MBU performance due to less drydocking jobs amidst prolonged border restriction; and (iii) higher finance cost following completion of DD3.

Earnings forecast and outlook. We cut our FY21-23F earnings (Table 5) to reflect the factors contributing to the losses in 9MFY21 as mentioned above. Notwithstanding, we still expect the company to return to profitability in FY22F onwards as we expect it to secure more projects amidst the upcycle in offshore spending. This includes FPSO Limbayong conversion job that we expect to be awarded in FY22 which would underpin its MBU segment. To recap, our forecast is based on HEU’s annual orderbook replenishment assumption of RM1bn.

Our call. Maintain BUY on MMHE with lower SOP-derived TP of RM0.65 (from RM0.83) which offers 51% upside. This implies 0.5x FY21F P/B (Table 4). We expect Petronas to expedite the roll-out of new development projects in FY22 following the high vaccination rate that would return activity to normalcy, hence benefitting the company as the market leader in local offshore project.

Source: BIMB Securities Research - 3 Nov 2021