Results

• Below Expectation: 1Q17 core loss stood at RM0.8m, below HLIB (+RM46m) and consensus (+RM34.5m) estimates.

Deviations

• Weaker than expected Marine revenue and margins due to lack of higher margin LNG repair jobs.

Highlights

• YoY: In 1Q17, the group posted core loss of RM0.8m vs. profit of RM29.9m in 1Q16 mainly caused by weaker Marine revenue and lower margins on the back of lesser LNG repair jobs done. This is being partially offset by narrower Offshore losses due to recognition of higher margin RAPID and F12 Kumang projects.
• QoQ: Group core loss narrowed from preceding quarter despite a 22.3% drop in top line sequentially due to (i) narrower loss from Offshore segment on better project margin and (ii) lower loss from JV. However, Marine division reported lower QoQ operating profit due to lower LNG repair jobs done.
• Several major projects were completed in the quarter with Besar WHP Topside, F12 Humang Topside, Baronia CPP sailed away in March 2017. However, majority of the projects’ profits was not recognized in 1Q17 as the HUC work for the projects have yet to be completed.
• Therefore, we anticipate MMHE to report better results in the subsequent quarters. Current orderbook at circa RM2bn including recently secured Bokor CPP (RM1bn) project.
• Overall, the group is bidding for RM4.5bn worth of jobs (comprising of CPP, RAPID and HUC-related jobs). We believe there will be more contracts to be secured by the group this year as oil majors would be more inclined to increase their CAPEX on a more stabilized oil price environment.

Risks

• Project execution risk and orderbook replenishment risk.

Forecasts

• FY17 core earnings forecast is cut by 39% to reflect lower Marine revenue and margins on the back of lower LNG vessel repair jobs.

Rating

BUY (↔)

• While earnings headwind is still present, outlook has improved for the company as more EPCC contracts are expected. Industry outlook has also turned brighter this year with more jobs expected to be dished out.

Valuation

• TP is revised up slightly to RM1.13 from RM1.11 as we roll forward our PBV valuation to FY18 pegged to unchanged 0.7x multiple.

Source: Hong Leong Investment Bank Research - 28 Apr 2017