Malaysia Marine Heavy Engineering Berhad (MMHE) fell into losses of RM389mn no thanks to a one-off additional cost provision for delayed in offshore campaign for Kasawari CPP project. Though management cited raw material price escalation as the main reason behind the cost overruns (vis-à-vis initial lump sum EPCIC contract value that for contract that was awarded years ago), we are less convinced given that such cost escalation has been provided during the procurement process previously. Rather, we believe a big chunk of the cost was from variation order request made by the client. Hence, we foresee little risk that it would not be able to recover this amount from the client. On a positive note, its revenue came at RM1.05bn which is the highest quarterly revenue since 2011. This signifies the beginning of a new upcycle, in our view. While the stock price declined 17% as a reaction to weak headline performance announcement, we see this as an opportunity to accumulate the stock. Maintain our BUY call on MMHE with unchanged TP RM0.94.

• Within expectation. Excluding the provision cost, the company made a core PATAMI of RM8mn in 1H23 which made up 12% of our FY23F forecast. We deem this as within estimate, in expectation of stronger activities from 2H23.

• QoQ. Revenue rose >100% QoQ to RM1.05bn due to commencement of new projects (i.e. Rosmari-Marjoram EPC and Kasawari CCS EPCIC projects). However, it posted a loss from operation amounted to RM389mn mainly due to additional cost provision made arising from delayed offshore campaign for Kasawari CPP project. This was due to (i) delayed in delivery of some equipment from vendor as a result of Covid-19 impact, and (ii) additional work scope requested by client. Excluding the cost provision, management guided that HEU segment was at breakeven which implies 2Q23 core PATAMI of RM4.7mn.

• YoY. Core PATAMI declined by 41% from RM8mn in 2Q22 mainly due to weaker marine repair (MBU) segment.

• Outlook. Orderbook remains solid at RM6.3bn whereas tenderbook currently stands at RM5-6bn. The company has completed the first phase of East Yard reactivation work which will help to execute its orderbook. The company has completed the steel cut for CarigaliPTTEPI Operating Company (CPOC) jacket at the East Yard recently. This will contribute to higher HEU profit potentially in 3Q23.

• Balance sheet. The company’s net cash position declined to RM90mn or RM0.06/share (from RM300mn) as at end 2Q23 mainly due to unbilled revenue as a result of delay in meeting contract payment milestone. However, this will reverse in upcoming quarters.

• Forecast. No change to our earnings forecast.

• Our call. Reiterate a BUY call on MMHE with unchanged TP of RM0.94. Our BUY recommendation is premised on the turnaround in heavy engineering segment.

Source: BIMB Securities Research - 17 Aug 2023