MMHE’s 1HFY18 core loss of RM86m was below our expectation and consensus dragged by poorer performance from both heavy engineering and marine segments. As at end-2QFY18, orderbook fell 8% by QoQ to RM1.1bn while tenderbook increased by 54% to RM4.3bn with higher local bids. Following that, we project FY18 to incur RM46m losses (from RM17m profit estimate) and slash FY19 earnings by 20% on higher cost base. All in, maintain our HOLD rating with lower TP of RM0.78 (0.5x FY19 P/B).

Results below expectations. MMHE recorded core net loss of RM86.1m in 1HFY18, falling below our and street’s FY18 net profit forecasts of RM17.2m and RM25.1m, respectively. The disappointing results were largely due to wider-than-expected losses in both heavy engineering and marine segment. No dividend was declared, as expected.

QoQ. Despite a 18.5% QoQ growth in revenue, MMHE’s core net losses widened by 1.4x to RM60.1m in 2QFY18, after stripping off unrealised forex gain of RM5.2m and net reversal of trade receivables impairment losses of RM6.8m. The weaker performance was largely due to weaker heavy engineering segment led by additional cost recognition on variation orders from RAPID projects as well as wider losses from marine segment dragged by higher conversion cost.

YoY. YoY, core losses also widened by 5.2x from RM9.8m in 2QFY17 no thanks to deterioration of earnings performance from both marine and heavy engineering divisions. Note that marine division sunk into losses of RM25.6m from RM14.3ml profit in 2QFY17 as a consequence of lesser repair works and deferral of dry docking activities.

YTD. Following that, its cumulative core losses enlarged by 7.8x to RM86.1m from RM9.8m in 1HFY17 dragged by poorer marine segment which slipped into losses of RM32.8m from a profit of RM23.7m in 1HFY17 but was partially cushioned by narrowed losses from heavy engineering segment backed by higher variation orders recognised in 1QFY18.

Heavy Engineering. MMHE is only left with one major project, Bokor CPP which is at 16% completion but bulk of its earnings would only come in significantly in FY19 as the first steel cut is expected in 3Q18. As at end-2QFY18, MMHE’s orderbook fell to RM1.1bn from RM1.2bn in 1Q18 without major contract secured during the quarter. However, its tenderbook has increased to RM4.3bn from RM2.8bn, of which 84% is offshore jobs.

Marine. Performance in 2HFY18 is expected to improve, benefiting from the deferral of some dry docking activities into this period. However, we expect this segment to remain in the red for the full FY18.

Forecast. We slashed our FY18 forecast to RM46.1m losses from a profit estimate of RM17.2m and reduced FY19 earnings forecast by 20% after increasing higher operating cost for both marine and heavy engineering segments.

Maintain HOLD, lower TP: RM0.78. Our TP is lowered to RM0.78 (from RM0.79) after earnings forecast adjustment pegging to unchanged 0.5x FY19 BVPS. All in, maintain HOLD recommendation as near term earnings weakness is likely to cushioned by potential contract win in 2HFY18 and strong balance sheet (net cash position of RM0.35/share).

Source: Hong Leong Investment Bank Research - 2 Aug 2018