MMHE’s 1H19 core loss of RM42m (-51% YoY) is deemed within expectations with the anticipation of stronger 2H19. Following the recent Kasawari EPCIC project win, orderbook has increased by 2.4x to RM3.0bn while tender book has reduced to RM3.2bn, of which bulk of it is attributable to offshore fabrication work. Meanwhile, first steel cut for Kasawari project could happen in 1H20 but we should only expect project billings to accelerate in 2H20. With no changes in our estimates, we maintain our HOLD rating with unchanged TP of RM0.89 pegged to 0.6x FY20 PBV.

Deemed within expectations. 2Q19 core net losses of RM9.5m (-71% QoQ, -84% YoY) brings 1H19’s total core net losses to RM41.9m (-51% YoY). This is considered within our expectations as compared to our FY19 core losses estimate of RM5.1m (consensus: -RM1.5m) as we expect stronger 2H19 on the back of better marine contribution. One-off adjustments include RM1.1m reversal of trade receivables impairment allowances and RM1.9m unrealised forex gain. No dividend was declared, as expected.

QoQ. MMHE’s core net losses narrowed by 71% to RM9.5m in 2Q19 thanks to lower losses in heavy engineering as a result of higher billings from on-going projects coupled with approved VOs. This is further supported by turnaround of marine segment due to higher dry docking activities.

YoY. In tandem with 24% YoY increase in topline, MMHE’s core losses also narrowed by 84% mainly helped by better performance from both segments. However, heavy engineering unit is still in operating losses as MMHE has reserved some additional manpower with the anticipation of pick up in local fabrications work in the next 12 months.

YTD. 1H19 core losses narrowed by 51% to RM41.9m largely attributable to turnaround of marine segment. This is offset by weaker heavy engineering unit as a result of higher unabsorbed overhead costs despite segmental revenue increasing by 11% in 1H19.

Heavy Engineering. Following the recent Kasawari EPCIC project win, orderbook has increased by 2.4x to RM3.0bn while tender book has reduced to RM3.2bn, of which bulk of it is attributable to offshore fabrication work. Bokor CPP is at 59% completion and is expected to complete by 3Q20. Meanwhile, first steel cut for Kasawari project could happen in 1H20 but we should only expect project billings to accelerate in 2H20.

Marine. Management is expecting marine segment to improve in 2H19 on the back of higher dry docking activities coupled with upgrading and retrofitting work for LNG vessels with the imminent implementation of IMO 2020. Dry Dock 1 is currently at 90% utilisation (vs 70% a year ago) while Dry Dock 2’s utilisation has also improved to 82% (from 72% a year ago). Dry Dock 3 is at 69% completion as of 2Q19 and is expected to commence operations by 2Q20.

Forecast. Unchanged.

Reiterate HOLD, TP: RM0.89. Our TP is maintained at RM0.89 pegged to 0.6x FY20 PBV. Despite MMHE is expected to deliver better results in 2H19, we are keeping our HOLD rating on the counter given that share prices have gained 57% YTD gain, suggesting most positives have been priced in.

Source: Hong Leong Investment Bank Research - 5 Aug 2019