MMHE’s 1QFY18 core loss of RM28m was below our expectation and consensus. Weak performance was mainly due to lower revenue from both Heavy Engineering and Marine segments. As at March 18, the group’s order book stood at RM1.22bn (1.3x FY17 revenue cover) comprising mainly of Bokor CPP (c.79% of total order book). RM2.8b worth of tenders has been submitted as of February 18. We reduce FY18-19 earnings forecast by 26% and 41% respectively after lowering orderbook replenishment assumptions. We maintain our HOLD rating with lower TP of RM0.82.

Results Below Expectations. 1Q18 core loss stood at RM28m, way below HLIB (RM54.9M) and consensus (RM28.7m) profit estimates.

YoY: In 1Q18, core loss of RM28m widened from core loss of RM0.8m in 1Q17 mainly due to lower revenue from both Heavy Engineering and Marine segment.

QoQ: Core loss was posted against core profit of RM34.2m in 4Q17 mainly due to recognition of change orders in Heavy Engineering segment in 4Q17.

Heavy Engineering. Revenue from Heavy Engineering segment declined due to lower revenue recognised from completed projects while ongoing projects are either nearing completion or still at early stages. Most of the major Heavy Engineering projects were completed in 1H17 (i.e. Besar, F12 Kumang Topside, Baronia CPP). The group is only left with one major project (Bokor CPP) but bulk of its earnings would only come in FY19 as the first steel cut is expected in 3Q18.

Marine. Marine segment is under pressure as ship owners deferred their dry docking activities due to uncertainty in the enforcement of new regulations in the shipping industry. Performance in 2H is expected to improve, benefiting from the deferral of some dry docking activities into this period.

Orderbook. As at March 18, the group’s orderbook stood at RM1.22bn (1.3x FY17 revenue cover) comprising mainly of Bokor CPP (c.79% of total order book). Some RM2.8b worth of tenders has been submitted as of February 18.

Forecast. We reduce FY18-19 earnings forecast by 26.4% and 40.7% respectively after lowering down order book replenishment assumptions as Petronas will remain focus on cost-cutting measures and downstream investment and hence we expect domestic O&G upstream capex to remain low in near-term.

Maintain HOLD, TP: RM0.82. Maintain HOLD with lower TP of RM0.82 (from RM0.85) after earnings forecast adjustment. TP is pegged to unchanged 0.5x FY18 BVPS.

Source: Hong Leong Investment Bank Research - 7 May 2018