• We reaffirm our stance on MMHE’s turnaround prospect as it has posted a second consecutive quarterly profits in 1Q24.

• Its orderbook replenishment is ‘impressive’ or maintained at RM6.9bn despite incurring a high burn rate of circa 50% in FY23. This was underpinned by the new orderbook secured for the fabrication of RE offshore windfarm substation.

• The company has recently secured the second work order for RE segment, boosting its RE’s orderbook to RM3.7bn or 40% of its total orderbook. This may improve margin as the scope for RE works is largely limited to fabrication which is within its core competency.

• Reiterate our BUY call on MMHE with a TP RM0.94. Our TP is derived using SOP method that implies 18x FY24F P/E and 1.1x FY24F P/B. We believe on the turnaround in its heavy engineering (HEU) segment anchored on its venture into RE will sustain its yard utilization rate and provide re-rating catalyst on the stock price.

Loss-making Contracts are Coming to Tail-end

MMHE has returned to profitability for two consecutive quarters in 4Q23 and 1Q24 as there were limited cost provision relating to loss-making legacy projects (i.e., Kasawari CPP EPCIC and Jerun CPP EPCIC). Both Kasawari and Jerun topsides have left the yards for commissioning stage, marking the tail-end of the project completion. As such, significant cost overruns may not recur in FY24.

Solid Outstanding Orderbook of RM6.9bn

We are also sanguine that earnings will be supported by the execution of remaining orderbook which remains within initial budget and schedule. To recap, its orderbook stood at RM5.4bn as at end 1Q24 which is comprised of (i) Rosmari-Marjoram EPC contract, (ii) Kasawari CCS EPCIC Alliance, (iii) Andalas-Jengka EPCI contract, and (iv) TenneT’s Ijmuiden der Alpha Offshore Substation (OSS) EPC project. The orderbook rose further by RM1.5bn or 28% to RM6.9bn following the award of Nederwiek 1 OSS EPC project recently. This will provide earnings visibility for next 3 years.

RE - More Fabrication Works, Reduce Dependency on O&G Projects

Notably, this boosted the proportion of RE windfarm to RM3.7bn or 40% of total orderbook. The prospect of receiving recurring orders in RE segment will reduce its reliance on cyclical local O&G fabrication project. More importantly, the workscope for OSS projects are purely limited to fabrication works and that bodes well for MMHE’s capability as the largest offshore fabricator in Malaysia.

Maintain BUY on MMHE with TP of RM0.94 Maintain MMHE as a BUY with TP of RM0.94. Our TP is based on SOP method that implies 18x FY24F P/E and 1.1x FY24F P/B (refer table 1). We believe this is fair amidst stronger prospect for turnaround arising from large orderbook and successful venture into fabrication of modular RE structure.

Source: BIMB Securities Research - 17 Jul 2024