MMHE’s FY18 core loss of RM113m was below our expectation and consensus dragged by weaker marine segment. As at end-FY18, orderbook fell by 11% QoQ to RM826m but tenderbook still remains strong at RM5.5bn including bids under Saudi Aramco’s LTA and overseas offshore fabrication work for renewable projects. Despite keeping our estimates, we maintain our HOLD rating with higher TP of RM0.61 (0.4x FY19 PBV). We reckon that near term earnings weakness will be offset by improving long term prospect and firm balance sheet (net cash position of RM0.37/share).

Results below expectations. MMHE registered core net loss of RM112.9m in FY18, exceeding our and street’s FY18 full year losses forecasts by 18% and 40%, respectively. The negative deviations likely stemmed from wider-than-expected losses in marine segment. No dividend was declared, as expected.

QoQ. MMHE’s core net losses narrowed by 59% to RM7.8m in 4Q18, after stripping off unrealised forex loss of RM0.2m and trade receivables impairment losses of RM17.2m. The better performance was largely due to higher contribution from the close-out of completed projects and higher billings from on-going projects in the heavy engineering segment. This is offset by higher operating losses from marine segment due to lower conversion works and dry docking activities.

YoY. Despite a 10% YoY increase in topline, MMHE slipped into the red this quarter from RM46.3m core earnings in 4Q17. The weaker performance was largely due to weaker heavy engineering segment in the absence of additional variation orders that was recognised in 4Q17 and higher tax expense of RM0.5m (vs RM20.9m tax credit in 4Q17).

YTD. MMHE incurred RM112.9m core losses in FY18, slipping from RM53.9m profit in FY17. Such disappointing results were largely due to poorer marine segment which slipped into losses of RM81.7m from a profit of RM52.6m in FY17 as a consequence of lower dry docking works and compressed margins.

Heavy Engineering. MMHE is only left with one major project, Bokor CPP which is at 37% completion. As at end-FY18, MMHE’s orderbook fell by 11% QoQ to RM826m without major contract secured during the quarter. However, its tenderbook stood at RM5.5bn, of which 55% are overseas jobs. This includes >RM1.0bn worth of offshore fabrication work on overseas renewable projects and RM500m bids for Saudi Aramco under the LTA secured last year.

Marine. Management is expecting marine segment to improve on the back of higher dry docking activities for LNG vessels. Therefore, we expect this segment to record profit in FY19.

Forecast. No change to our earnings estimates as we have forecasted RM11.4m net profit in FY19 premising on higher billings from Bokor project and recovery of marine segment.

Reiterate HOLD, higher TP: RM0.61. Despite maintaining our earnings estimates, we increase our TP to RM0.61 (from RM0.55) pegging to higher multiple of 0.4x FY19 PBV (from 0.35x previously). This is premised on improving prospect subsequent to the bidding under Saudi Aramco’s LTA coupled with recovery of marine segment. All in, maintain HOLD rating as the abovementioned catalysts could be offset by unexciting financial performance in the next two quarters amidst strong balance sheet (net cash position of RM0.37/share).

Source: Hong Leong Investment Bank Research - 13 Feb 2019