MMHE’s 1Q19 core loss of RM32m was below our and consensus expectations, dragged by weaker heavy engineering segment. As at 1Q19, order book increased by 5% QoQ to RM864m while tender book also improved by 15% to RM6.3bn on higher local offshore structure bids. Post earnings cut, we maintain our HOLD rating with lower TP of RM0.75 (0.5x 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 recorded core net loss of RM32.4m in 1Q19, falling below our and consensus FY19 net profit forecasts of RM11.4m and RM10.4m, respectively. The disappointing results were largely due to wider-than-expected losses in heavy engineering segment. No dividend was declared, as expected.

QoQ. MMHE’s core net losses widened by 3.2x to RM32.4m in 1Q19, after stripping off unrealised forex gain of RM1.9m and trade receivables impairment reversal of RM1.4m. The poorer performance was mainly dragged by wider losses in heavy engineering as a result of lower billings from on-going projects following completion of several projects in FY18. This was offset by stronger marine segment due to higher dry docking activities.

YoY. Despite an 8% YoY increase in top line, MMHE’s core losses also widened by 29% no thanks to higher losses from heavy engineering segment. We understand that MMHE has reserved some additional manpower with the anticipation of more local fabrications work to be awarded in the next few months. Therefore, it has resulted in higher unabsorbed overheads.

Heavy Engineering. MMHE is only left with one major project, Bokor CPP which is at 49% completion. As at end-1Q19, MMHE’s order book increased by 5% QoQ to RM864m on the back of higher work orders for marine segment offsetting declining backlog for heavy engineering segment. However, its tender book has expanded by 15% QoQ to RM6.3bn with an equal split between local and overseas bids. We gather that the increase in bid book is led by local offshore wellhead platform fabrication work under Petronas’ 6-year frame work agreement that was secured in Jan-19. The contract could be awarded earliest by end-2Q19.

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. We slashed our FY19 forecast to RM5m losses from a profit estimate of RM11.4m and reduced FY20 earnings by 10% to RM34m after imputing higher operating cost for heavy engineering segment. Meanwhile, FY21 earnings forecast of RM37m (+7% YoY) is introduced with an annual order book replenishment assumption of RM1bn.

Reiterate HOLD, lower TP: RM0.75. Our TP is lowered to RM0.75 (from RM0.77) 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 2H19 and strong balance sheet (net cash position of RM0.32/share).

Source: Hong Leong Investment Bank Research - 29 Apr 2019