MMHE’s 9M19 core loss of -RM46.5m (-55.4% YoY) is below ours and consensus expectations. The deviations are mainly due to weaker than expected contributions from the marine segment (revenue: -18.5% QoQ, operating profit: -71% QoQ), whilst losses widened from Heavy Engineering due to unabsorbed overheads. We revise our FY19 forecasts to -RM22m from -RM5m as we factor in tighter margins from both operating segments. However we are keeping our FY20-21 numbers on the back of maiden contributions from DD3 and ramp up in billings coming from the heavy engineering segment. Maintain HOLD with unchanged TP of RM0.89 pegged to 0.6x FY20 PBV.

Below expectations. 3Q19 core net loss of -RM4.7m (-50.8% QoQ, -75.4% YoY) brings 9M19’s total core net loss to -RM46.5m (-55.4% YoY). This is below ours and consensus expectations as compared to our FY19 core losses estimate of -RM5.1m (consensus: -RM8.9m). The deviations are mainly due to weaker than expected contributions from the marine segment (revenue: -18.5% QoQ, operating profit: -71% QoQ).

QoQ. MMHE’s core net losses narrowed to -RM4.7m in 3Q19 (from core net loss of - RM9.5m in 2Q19) thanks to a lesser red heavy engineering (operating loss of - RM6.8m vs. -RM19.8m QoQ) as a result of higher billings from on-going projects.

YoY. MMHE’s core loss narrowed by 75.4% YoY to -RM4.7m (from -RM19.0m YoY) aided by better performance from the marine segment offset by thinner margins and topline dipping by 14.4% YoY at heavy engineering, post sail away projects. We understand that MMHE has reserved some additional manpower with the anticipation of pick up in local fabrications work in the next 12 months.

YTD. 9M19 core losses narrowed by 55.4% to -RM46.5m (from -RM105.1m YoY), largely attributable to the marine segment turning around (operating profit: RM3.6m vs. -RM48.8m YoY). This is offset by weaker heavy engineering unit as a result of lower contributions from post sail away projects.

Heavy Engineering. Following the recent Kasawari EPCIC project win, orderbook stands at RM2.7bn as of 9M19, whilst MMHE’s tender book is at RM13.7bn, of which bulk of it is attributable to offshore fabrication work. Bokor CPP is at 69% 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. We continue to expect the marine segment to improve in the coming quarters 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, while Dry Dock 2’s utilisation has also improved to 82%. Dry Dock 3 is at 77% completion stage as of 3Q19 and is expected to commence operations by 2Q20.

Forecast. We are revising our FY19 forecasts to core losses of -RM22m from a core loss of -RM5 as we factor in tighter margins from both operating segments. However we are keeping our FY20-21 numbers on the back of maiden contributions from DD3 and ramp up in billings coming from the heavy engineering segment.

Reiterate HOLD, TP: RM0.89. Our TP is maintained at RM0.89 pegged to 0.6x FY20 BVPS. We expect MMHE to deliver better results in 4Q19 and turn around in FY20. However we are keeping our HOLD call for now given the run up in share price (YTD 68%) and await further signs of continuous improvement in orderbook execution.

Source: Hong Leong Investment Bank Research - 25 Oct 2019