• MMHE’s turnaround story remain intact after posting a 21% YoY revenue growth in 1Q22 on account of steady construction progress of large Kasawari & Jerun CPP projects and stronger demand for marine repairs.

• The company may reduce its reliance on Petronas’ cyclical development projects in the medium term on the back of support from structural income growth from new dry dock DD3 and new venture in RE fabrication projects. In near term, earnings will be supported by orderbook replenishment amidst financial constraint faced by its main competitor.

• Reiterate our BUY call on MMHE with a TP RM0.65. Our Buy recommendation is premised on (i) full economic reopening to improve its MBU segment and (ii) potential new project awards in coming quarters that could drive its stock price higher.

Full Economic Openings a Boon

MMHE recorded a 21% YoY increase in revenue to RM417.8m in 1QFY22 driven by recovery in business activities which was previously hampered by movement restrictions. The Heavy engineering (HEU) segment’s revenue rose by 18% YoY on steady construction progress of 2 large fabrication projects (i.e., Kasawari and Jerun CPP) whereas the marine repair business (MBU) achieved a 51% increase in revenue to RM59.4m. This revenue growth has led to a headline PATAMI of RM2.7m though it was aided by a one-off gain from reversal of net impairment loss on trade receivable amounted to RM9.4m. The cost provision that was made in prior quarters were also not recurring in 1QFY22 despite the increase in raw materials.

Growth on Multiple Fronts…

We expect the company’s earnings to recover further in 2H2022 as full economic reopening is expected to boost demand for marine repairs. This will bode well for the MBU segment following the commercialisation of new dry dock DD3 since 1Q21 and hence, a structural income growth. This, coupled with sustainable HEU’s orderbook, is expected to lift MMHE back into steady profits from FY22F onwards. Of note, the management expects HEU’s project award of c.RM3bn in FY22 (vis-à-vis our annual HEU orderbook replenishment assumption of RM1bn). This includes (i) Shell’s Crux CPP project in Australia, (ii) Shell’s Rosmary & Marjoram project in Malaysia and (iii) PTTEP’s Lang Lebah project in Malaysia. In medium term, earnings could be lifted by steady revenue streams from the RE segment (i.e., fabrication of offshore windfarm’s jackets) which may be materialised at the earliest in FY23F. As such, its earnings quality will improve as it will be less dependent on Petronas’ cyclical development projects. Its tenderbook size currently stands at RM18bn with 85% or c.RM15.3bn are comprised of international projects. Its orderbook currently stands at RM1.9bn.

Reiterate BUY Call on MMHE with TP of RM0.65

Reiterate our BUY recommendation on MMHE with unchanged TP of RM0.65. This implies 0.5x FY21F P/B.

Source: BIMB Securities Research - 5 Jul 2022