MMHE’s 1QFY20 core net profit of RM2.9m (vs. -RM32.4m SPLY) came in below expectations dragged by weaker Marine segment. We trim our FY20 numbers by 27% as we factor in lower utilisation and activities in 2Q20 due to the MCO. Our TP is maintained at RM0.74 pegged to 0.5x FY20 BVPS (-0.5SD 5 year mean). We continue to expect MMHE to continuously improve in FY20. Furthermore , the stock is backed by RM0.28/share in cash or c.61% of its current market cap and a healthy orderbook of RM2.7bn. Maintain BUY.

Results below expectations. 1QFY20 core net profit of RM2.9m (vs. -RM32.4m SPLY), came in below expectations accounting for 8%/10% ours and consensus FY20 forecasts respectively. No dividend was declared, as expected. We arrived at our core profit figure after adjusting for forex gains of RM4.2m and allowance for impairment for impairment loss on trade receivables of RM0.9m. The results came in below expectations namely due to weaker contributions from the marine segment in 1Q20.

QoQ. MMHE continues to maintain its profitability trajectory, recording a core profit of RM2.9m in 1Q20 (-85.7% QoQ) after adjusting for unrealised forex gains of RM4.2m and allowance for impairment losses on receivables of RM0.9m. Despite improved performance from the heavy engineering segment (Operating profit of RM1.2m vs - RM10.6m QoQ) on higher revenues achieved, the Marine segment recorded a loss of -RM1.5m due to lower conversion work and higher unabsorbed overheads during the quarter.

YoY. Revenue improved by 70.6% YoY as both segments showed improvements driven largely by an uptick in activities. This resulted in the group reversing its position from recording losses of -RM32.4m during the SPLY.

Operating segments. The engineering orderbook stands at healthy RM2.73bn as of 1Q20 (off which c.70% can be attributed to the Kasawari EPCIC award), whilst MMHE’s tender book is at a solid RM17.0bn. Regarding its marine segment, Dry Dock 1 (93% utilisation) and Dry Dock 2 (88% utilisation) continue to show good utilisation in 1Q20 on the back of higher dry docking activities. Whilst Dry Dock 3 is at 92.0% completion stage as of 1Q20 and is expected to commence operations by 3Q20.

Outlook. Despite the murky outlook in the near term for the O&G sector, the saving grace for the local players is PETRONAS' intention to maintain its domestic capital spending plans in FY20. MMHE‘s orderbook of RM2.7bn and net cash of RM440m should aid in seeing through FY20 relatively unscathed. Furthermore, we expect a recovery in 2H20 as their yard and dry dock operations comes fully online, premised Covid-19 subsiding. Nonetheless, we expect slower billings from heavy engineering and dry dock utilisation in 2Q20 arising from the MCO. Note that MMHE’s has received the thumbs up to resume operations at full scale on the 28th April.

Forecast. We trim our FY20 numbers by 27% as we factor in lower utilisation at the yard as well as dry docking activities in in 2Q20 due to the MCO.

Maintain BUY, TP: RM0.74. Our TP is maintained at RM0.74 pegged to 0.5x FY20 BVPS (-0.5SD 5 year mean). We continue to expect MMHE to turn around in FY20 and maintain our BUY call. The sell down has provided an opportunity to collect the stock, which continues to show earnings improvement. Furthermore, the stock is backed by RM0.28/share in cold hard cash or c.61% of its current market cap.

Source: Hong Leong Investment Bank Research - 30 Apr 2020