MMHE’s 9MFY18 core loss of RM105m was below our expectation and consensus dragged by weaker marine segment. As at end-3QFY18, orderbook fell by 15% QoQ to RM932m but tenderbook increased by 39% to RM6.0bn with higher local bids. Following that, we widened our FY18 losses to RM94m and slash FY19-20 earnings by 3-4% on higher cost base. All in, maintain our HOLD rating with lower TP of RM0.68 (0.45x FY19 PBV).

Results below expectations. MMHE registered core net loss of RM105.1m in 9MFY18, exceeding our and street’s FY18 full year losses forecasts by 1.3x and 2.4x, respectively. The negative deviations likely stemmed from wider-than-expected losses in marine segment. No dividend was declared, as expected.

QoQ. In tandem with 30% QoQ surge in revenue, MMHE’s core net losses narrowed by 69% to RM19.0m in 3QFY18, after stripping off unrealised forex gain of RM0.7m and trade receivables impairment losses of RM4.5m. The better performance was largely due to narrowed losses for both heavy engineering segment (led by higher billings from Bokor project) and marine segment (helped by higher dry docking activities).

YoY. Despite a 35% YoY jump in topline, MMHE slipped into the red this quarter from RM17.3m core earnings in 3QFY17. The weaker performance was largely due to weaker heavy engineering segment led by additional cost provisions for on-going projects. Marine division also sunk into losses of RM15.9m from RM16.9ml profit in 3QFY17 on higher conversion costs and compressed margins for dry docking services.

YTD. MMHE incurred RM105m core losses in 9MFY18, slipping from RM7.6m profit in 9MFY17. The disappointing results were largely due to poorer marine segment which slipped into losses of RM48.8m from a profit of RM40.6m in 9MFY17 as a consequence of lower dry docking margins and additional cost incurred pending VO approval from clients.

Heavy Engineering. MMHE is only left with one major project, Bokor CPP which is at 25% completion but bulk of its earnings would only come in significantly in FY19. As at end-3QFY18, MMHE’s orderbook fell by 15% QoQ to RM932m from RM1.1bn in 2QFY18 without major contract secured during the quarter. However, its tenderbook has increased to RM6.0bn from RM4.3bn, of which 47% are overseas jobs. We reckon that the spike in bid book is attributable to the EPCIC contract for Kasawari project, which could be a race between MMHE and Sapura Energy.

Marine. Performance of marine segment is expected to improve, benefiting from the deferral of some dry docking activities in 1HFY18. However, we expect this segment to remain in the red for the full FY18 but return to profit in FY19.

Forecast. We widened our FY18 loss forecast by 1.1x to RM94.4m and reduced FY19-20 earnings forecast by 3-4% after increasing higher operating cost for marine segments.

Maintain HOLD, lower TP: RM0.68. Our TP is lowered to RM0.68 (from RM0.78) after earnings forecast adjustment pegging to lower multiple of 0.45x (from 0.5x) FY19 PBV. All in, maintain HOLD rating as near term earnings weakness is likely to cushioned by potential contract win in the near term and strong balance sheet (net cash position of RM0.37/share).

Source: Hong Leong Investment Bank Research - 26 Oct 2018