FY20 core net loss of -RM114.3m (SPLY: -RM26.6m) came in within our (FY20f: - RM116.9m) but below consensus’ (FY20f: -RM73.6m) expectations. We expect an improvement in FY21 performance due to higher contribution from Kasawari and the marine segment. However, we remain cautious on MMHE’s operational track record despite its higher expected revenue contribution from its orderbook backlog. We maintain our HOLD rating with TP of RM0.43 pegged to 0.35x FY20 BVPS.

Results within expectations. 4QFY20 core net loss of -RM6.5m (QoQ: RM1.7m, YoY: RM20.0m) and FY20 core net loss of -RM114.3m (SPLY: -RM26.6m) came in within ours (FY20f: -RM116.9m) but below consensus’ (FY20f: -RM73.6m) expectations. No dividend was declared, as expected. We arrived at our core profit figure for FY20 after adjusting for (i) impairment losses on PPE: RM297.7m, trade receivables: RM15.5m, right-of-use assets: RM2.3m, (ii) amortisation of right of use assets: RM8.8m, (iii) net unrealised loss on forex: RM1.5m and (iv) net income from scrap disposal: RM6.1m and other minor items.

QoQ. MMHE recorded a revenue of RM695.5m (+88.3% QoQ) and a core loss of -RM6.5m (RM1.7m). The weaker performance was due to additional cost provisions (c.RM50m) from the Covid-19 pandemic, mitigated by a huge improvement in its marine segment result (RM21.2m vs RM1.2m) through the increased dry docking activities of LNG vessels. We did not adjust for the aforementioned c.RM50m in Covid-19 provisions in the current quarter as we view that it is an item that would recur in FY21 and FY22.

YoY. Revenue increased by 152.3% YoY (80% from Kasawari). However earnings slipped back into the red (-RM6.5m vs RM20.0m) due to Covid-19.

YTD. The higher losses (RM114.3m vs RM26.6m) was mainly attributable to the MCO imposed in 2QFY20 which severely restricted its operations.

Operating segments. Engineering orderbook stands at a healthy RM1.9bn as of 4QFY20 (off which c.90% can be attributed to the Kasawari EPCIC award), whilst MMHE’s tender book is at a solid c.RM12bn. Yard utilisation in 4Q stood at 43%.

Outlook. We remain cautious on the prospects of MMHE despite its higher expected contribution from Kasawari in FY21 as its operational track record has not been in the best state. The silver lining is that LNG activity is picking up and this could bode well for the marine segment if the trend continues. It needs to replenish its orderbook backlog before Kasawari reaches the tail end of its construction phase or risk experiencing a huge decline in revenue in FY22 and beyond. Its widening negative FCF also remains a cause of concern as 12M20 negative FCF has increased by c.70% YoY. Nevertheless, its sizable debt drawdown facilities of about c.RM600m is expected to satisfy any working capital required for operations for a year.

Forecast. No changes to forecast as the results were in-line with expectations.

Maintain HOLD, TP: RM0.43. We maintain our TP of RM0.43 based on 0.35x FY20 BVPS, which is -0.9SD below its 5 year historical mean P/B. We believe we would need to see an improvement in operational efficiency from MMHE in order for us to warrant a buy call on the stock.

Source: Hong Leong Investment Bank Research - 10 Feb 2021