2Q21 core net loss of -RM25.3m (QoQ: -RM106m, YoY: -RM112m) and 1H21 core net loss of -RM131m came in below our (FY21f: -RM129m) and consensus’ (FY21f: -RM73.6m) expectations due to lower than expected work activity from the resurgence of Covid-19 cases. MMHE is expected to experience a reduction in operating capacity for its heavy engineering segment in 2H21 if strict FMCO measures are still in place. Hence, we maintain our SELL rating with a TP of RM0.35 (from RM0.40) pegged to 0.30x (from 0.35x) FY21 BVPS. Total orderbook cover currently stands at 1.7x.

Below expectations. 2Q21 core net loss of -RM25.3m (QoQ: -RM106m, YoY: - RM112m) and 1H21 core net loss of -RM131m came in below our (FY21f: -RM129m) and consensus’ (FY21f: -RM73.6m) expectations due to lower than expected work activity from the resurgence of Covid-19 cases. No dividend was declared, as expected. We arrived at our core profit figure for 1H21 after adjusting for RM7.4m of EI mainly comprising of an impairment loss amounting to RM7.8m.

QoQ. MMHE recorded a revenue of RM302m (-12.0% QoQ) and a core loss of - RM25.3m (from -RM106m). The better performance was primarily attributable to the absence of the additional cost provisions from the completion delay for one of its offshore projects in 1Q21.

YoY. Revenue was up YoY at RM302m (+94.7% YoY) due to higher work activity as utilisation was significantly lower in 2Q20 due to MCO 1.0. Consequently core net loss narrowed to -RM25.3m (vs -RM112m in 2Q20).

YTD: Core net loss widened to -RM131m from -RM110m in 2Q20 due to the delays and provisions from its closure of its yard during MCO 1.0.

Going green: MMHE has installed an 8.3 MWp solar panel for its yards and it is expected to result in RM30m of cost savings over 20 years, in-line with its quest to reduce its carbon emissions.

Orderbook. Current orderbook stands at RM2.7bn as of 1Q21 (Kasawari EPCIC: c.47%; Jerun CPP: c.41%; marine: c.1.5%; others: c.10.5%) translating to an orderbook cover of 1.7x.

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. We believe that the recent resurgence in Covid19 cases would also impede its productivity as MMHE would have to adhere to a lower staff headcount for its yards and stricter SOP measures.

Forecast. We downgrade FY21 earnings from a loss of -RM129m to a loss of -RM150m while leaving our FY22/23 forecast unchanged.

Maintain SELL, TP: RM0.35. We downgrade our TP from RM0.40 to RM0.35 based on 0.30x (from 0.35x) FY21 BVPS, which is -1.1SD 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 - 2 Aug 2021