• Maintain BUY (TP: RM0.94). Malaysia Marine Heavy Engineering (MMHE) 1H24 core earnings of RM56.4mn (>100% YoY) came above both our and consensus’ expectation at 89% and 115% respectively. We revised higher our FY24-26F earnings estimate by 46-82% as we revisit our margin assumption on better orderbook quality from its RE venture. Both Jerun and Kasawari projects have achieved first gas in 3Q24 thus marking the completion of ailing ‘legacy projects’. Strong 2Q24 profit has further reinforced our view on its turnaround story. Reiterate a BUY call on MMHE with an unchanged SOP-derived TP of RM0.94 which implies 1x FY25F P/B.

• Key highlights. 2Q24 core earnings surged to RM48.1mn underpinned by (i) successful claim of cost recovery, and (ii) profit contribution from progress of existing projects. Heavy Engineering (HEU) segment revenue was lower by 7% QoQ and 18% YoY to RM810mn following the progress of both Jerun and Kasawari CPP projects that has come to tail-end, leaving only 4 on-going projects in the yards (refer to Table 3). Nonetheless, its profit jumped to RM68mn aided by gains from changes in FV of derivatives amounted to RM22.8mn as well as successful claim of cost recovery. Meanwhile, marine business (MBU) segment recorded stable profit with PBT of RM9.1mn despite revenue declined by 22% QoQ to RM91mn.

• Earnings Revision. We raised our FY24F/FY25F/FY26F earnings forecast by 82%/46%/57% (refer to Table 4) on better orderbook quality and lower overall project risk from RE workorders. Note that the work scope for this is limited to EPC/fabrication work of which it has better control on project delivery. Meanwhile, the transport and installation (T&I) scope which is executed by third-party contractors is not part of the contract, hence limiting possibility of cost overruns which typically recognised during any project delay.

• Outlook. Orderbook rose to RM6.3bn from RM5.4bn in 1Q24 (refer to Chart 1) as it secured second offshore wind project (i.e. Nederwiek 1 Project) from Petrofac amounted to RM1.5bn. Tenderbook remain robust at RM7-8bn which include PTTEP’s Lang Lebah CPP project as well as subcon works for foreign projects. On MBU, we believe the company has secured two conversion works namely (i) Hibiscus’ SF30 Water Injection Facility from Uzma, and (ii) FSU conversion works for PetGas’ RGT, which bodes well for MBU margin in upcoming quarters.

Source: BIMB Securities Research - 22 Aug 2024