MMHE’s 1HFY20 core net loss of -RM110m (SPLY: -RM41.9m) came in below expectations dragged by weaker performance for both the engineering and marine segments due to the MCO. We revise our FY20 numbers to a core loss of -RM117m from a profit of RM14.2m previously while cutting our forecast for FY21-22 by 31/15% respectively. We believe that lower YoY utilisation of its marine segment is likely to continue to due to international border restrictions as Covid-19 continues to proliferate. “Covid-19 overheads” are also expected to continue due to SOPs imposed and cash balance is also expected to decline as the Company is expected to end the year in the red. We downgrade our call from Hold to SELL and we cut our TP to RM0.30 pegged to 0.2x FY20 BVPS (- 1.5SD from 5 year mean) from RM0.37 previously. We expect its marine and engineering segments to remain weak until FY21 based on current circumstances.

Results below expectations. 2QFY20 core net loss of -RM112m (QoQ: RM2.9m, YoY: -RM9.5m) and 1HFY20 core net loss of RM109.5m (SPLY: -RM41.9m) came in significantly below our and consensus’ expectations as both parties have forecasted MMHE to be in the green in FY20. No dividend was declared, as expected. We arrived at our core profit figure for 2QFY20 after adjusting for impairments losses of RM300m and net unrealised loss on foreign exchange of RM3.9m. The results shortfall was namely due to weaker contributions from both the engineering and marine segments in 2Q20 as the MCO impeded productivity and delivery of vessels. MMHE has experience a 20 day yard closure due to the MCO which began on 18 Mar. The minimal decreases in its cash balance amounting to RM59.7m was primarily attributable to an extension in its days of payable outstanding as trade payables went up by RM65.9m.

QoQ. MMHE has slipped into the red from a profit last quarter (RM2.9m), recording a core net loss of -RM112m in 2Q20 after adjusting for impairment losses amounting to RM300m and unrealised forex losses of RM3.9m. The poor results were primarily attributable to its 20 day yard closure for its engineering segment and border closures for its marine segment.

YoY. 2QFY20 revenue declined by 43.8% YoY despite having a higher orderbook backlog as both segments showed declines due to the Covid-19 pandemic.

Operating segments. The engineering orderbook stands at healthy RM2.6bn as of 2Q20 (off which c.70% can be attributed to the Kasawari EPCIC award), whilst MMHE’s tender book is at a solid RM12.5bn. Yard utilisation has fallen to about 70% due to the MCO imposed in March and April. There are currently about 10-12 vessels stuck in its yards due to international border restrictions whilst Dry Dock 3 is at 94.0% progress as of 2Q20 and completion is expected to be delayed further due to the MCO imposed in March as many of its workers have went back to their home country and have not returned to Malaysia.

Outlook. We believe that the outlook for MMHE is negative in the near term as the standard operating procedures implemented in its yards are expected to eat into its margins further and border restrictions are expected to continue to plague the company. The construction phase for the largest portion of its orderbook (Kasawari project) is only expected to begin in 2021 and earnings for the aforementioned project are only expected to be material in FY22. Its financial position is also expected to be weaker in FY20 as the Company is expected to remain in the red. We also expect cash balance to fall further when days of payable outstanding normalises. However, its sizable debt drawdown facilities of about c.RM750m is expected to satisfy any working capital requirements. MMHE is expected to drawdown c.RM150 -200m from its existing debt facilities before the end of FY20.

Forecast. We revise our FY20 numbers to a core loss of -RM117m from a profit of RM14.2m previously while cutting our forecast for FY21-22 by 31/15% respectively as we view that the new SOPs imposed like social distancing measures are expected to impede productivity and international border restrictions are expected to cause further delivery delays for its marine segment.

Downgrade to SELL, TP: RM0.30. We cut our TP from RM0.37 previously to RM0.30 based on 0.2x FY20 BVPS, which is -1.5SD below its 5 year historical mean P/B, thereby downgrading our call from a Hold to a SELL. We believe that MMHE would continue to see its balance sheet deteriorating as its operating segments are expected to suffer due to the Covid-19 pandemic despite its current net cash position of RM0.27 per share.

Source: Hong Leong Investment Bank Research - 24 Jul 2020