1Q21 core net loss of -RM106.0m (QoQ: -RM6.5m, YoY: RM2.9m) came in significantly below our (FY21f: RM16.8m) and consensus’ (FY21f: RM22.4m) expectations due to the provisions made for the completion delay for one of its offshore projects. We do not discount the aforementioned instance from recurring in the future due to the instances of cost overruns and delivery delays from previous projects. Hence, we downgrade our Hold rating to a SELL with a TP of RM0.40 (from RM0.62) pegged to 0.35x (from 0.5x) FY21 BVPS. Total orderbook cover currently stands at 1.9x.

Below expectations. 1Q21 core net loss of -RM106.0m (QoQ: -RM6.5m, YoY: RM2.9m) came in below ours (FY21f: RM16.8m) and consensus’ (FY21f: RM22.4m) expectations due to additional cost provision recognised for one of its offshore projects from the revision of its completion target date. No dividend was declared, as expected. We arrived at our core profit figure for 1Q21 after adjusting for (i) amortisation of right of use assets: RM1.9m, (ii) net income from scrap disposal: -RM0.9m, (iii) net unrealised gain on forex: -RM2.5m and (iv) reversal of impairment on trade receivables : -RM0.9m.

QoQ. MMHE recorded a revenue of RM343.6m (-50.6% QoQ) and a core loss of - RM106.0m (from -RM6.5m). The weaker performance was primarily attributable to the additional cost provision from the completion delay for one of its offshore projects.

YoY. Revenue was flat YoY at RM343.6m (-0.8% YoY). However earnings slipped back into the red (-RM106.0m vs RM2.9m) due to the same reason mentioned above.

Orderbook. Current orderbook stands at RM3bn as of 1Q21 (Kasawari EPCIC: c.55%; Jerun CPP: c.33%; marine: c.2%; others: c.10%) translating to an orderbook cover of 1.9x.

Outlook. We remain cautious on the prospects of MMHE despite its recent Jerun CPP contract win as its operational track record has not been in the best state. We do not discount the possibility of further cost overruns or delivery delays for its current projects despite its higher orderbook backlog.

Forecast. We downgrade FY21 earnings from RM16.8m to a loss of -RM129.2m and our FY22/23f forecast by -37/-16% to factor in potential cost overruns and execution risks in the future.

Downgrade to SELL, TP: RM0.40. We downgrade our TP from RM0.62 to RM0.40 based on 0.35x (from 0.5x) FY21 BVPS, which is -0.9SD below its 5 year historical mean P/B. We believe we would need to see a consistent improvement in operational efficiency from MMHE in order for us to warrant a re-rating on our call.

Source: Hong Leong Investment Bank Research - 30 Apr 2021