MMHE’s FY19 core loss of RM26.6m was slightly below ours and consensus expectation, dragged by weaker Heavy Engineering segment. As at end-FY19, orderbook is at a healthy RM2.96bn whilst tender book still remains strong at RM12.9bn. We are keeping our estimates and upgrading to BUY (from Hold) given the sell down since our last report and nascent signs of earnings improvement. Furthermore, the stock is backed by RM0.31/share in net cash or c.40% of its current market cap.

Slight miss. 4Q19 core profit of RM20.0m (from core loss of -RM4.7m QoQ, - RM7.6m YoY) brought full year FY19 core net losses to RM26.6m (vs. core losses of - RM112.9m YoY), which is slightly below ours and consensus FY19 full year loss forecasts of RM22.0m (-21%) and RM29.2m (-9%), respectively. The deviations stemmed from a slower recovery in their heavy engineering segment (revenue: - 11.2% YoY, operating profit: >-100% YoY). No dividend was declared, as expected.

QoQ. MMHE turned the corner, recording a core profit of RM20.0m 4Q19 (from -RM4.7m QoQ), after adjusting for unrealised forex losses of RM2.1m and allowance for impairment losses on receivables of RM8.6m. Apart from stronger showing from the marine segment (revenue: +25.2% QoQ, operating profit: 108% QoQ), MMHE benefited from a one off tax credit from the IRB amounting to c.RM6m which resulted in positive tax. Management expects this to be a one off event.

YoY. Revenue improved by 0.9% YoY to RM275.6m, with declines in heavy engineering (-33.7% YoY) being offset improvements from the marine segment (+158.4% YoY). Losses continue to narrow on improvements in operating margins (blended basis: 4Q18: -107% vs. 4Q19 +0.6%). Additionally, 4Q19 recorded a higher positive tax of RM6.4m (vs RM0.5m tax in 4Q18).

YTD. Revenue improved by 3.6% YoY to RM1.0bn, whilst losses continue to narrow (FY18: -RM112.9m vs. FY19: -RM26.6m) thanks to a strong showing from the Marine segment partially offset by a decline in profitability at heavy engineering post sail away projects.

Heavy Engineering. Following the recent Bekok EPCIC and Bergading CPP-MRU project wins, orderbook stands at healthy RM2.96bn as of end-FY19 (off which c.70% can be attributed to the Kasawari EPCIC award), whilst MMHE’s tender book is at a solid RM12.9bn. Meanwhile, first steel cut for Kasawari project was undertaken in Jan 2020, but we should only expect project billings to accelerate in 2H20 onwards.

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 implementation of IMO 2020. Dry Dock 1 recorded a 91% utilisation, while Dry Dock 2’s recorded utilisation rate of 78% in FY19 respectively. Dry Dock 3 is at 86.6% completion stage as of 4Q19 and is expected to commence operations by 3Q20.

Forecast. Unchanged. We are keeping our FY20-21 numbers on the back of nascent signs of earnings improvement coupled with expectations of higher activities in FY20.

Upgrade to BUY, TP: RM0.89. Our TP is maintained at RM0.89 pegged to 0.6x FY20 BVPS. We expect MMHE to turn around in FY20. We upgrade to BUY from Hold given the sell down since our last report (-12.4%) and on nascent signs of earnings improvement. Furthermore, the stock is backed by RM0.31/share in net cash or c.40% of its current market cap.

Source: Hong Leong Investment Bank Research - 13 Feb 2020