As a result of lower operating losses recognised by the heavy engineering segment, MMHE booked a decent 3Q17 profit, after 9 consecutive quarters of earnings declines. We think this huge improvement in earnings could however be a one-off, potentially as a result of reversal of provisions made earlier on certain projects. Nevertheless, we expect FY18 earnings to turn around on the back of better visibility on workflows. We raise our TP to RM0.81 based on a higher 0.5x P/BV multiple, but maintain our HOLD call.

Commendable Results Lifted by Lower Heavy Engineering Losses

MMHE’s 3Q17 core net profit came in at RM20.6m after excluding RM3.4m unrealised forex loss, RM2.6m FV gains on derivatives, RM0.5m disposal gains and RM3.8m impairment loss on trade receivables and written-off inventories. This brought cumulative 9M17 core profit to RM10.6m, which we deem to be in line with our RM5m FY17 profit estimate, as we expect a slight loss in 4Q. The commendable 3Q results were predominantly lifted by lower operating losses registered at the heavy engineering segment (3Q17: -RM1.8m; 2Q17: -RM22.4m; 3Q16: -RM21.6m).

Weaker Marine Profit Offset Positive Impact From Heavy Engineering

While revenue from the heavy engineering segment fell by 47% yoy to RM117.6m, operating losses narrowed to RM1.8m from the finalisation of completed projects in 3Q. Meanwhile, in tandem with the decline in marine

segment revenue (-14.1%), operating profit also fell by 14.7% yoy as a result of lower value and number of vessels being repaired. On the whole, overall operating margin improved from -5.3% to +9.9%, lifted mainly by the better performance of the heavy engineering segment.

Raise TP, But Maintain Rating

As at end-3Q17, MMHE’s outstanding order book stood at RM1.4bn, from RM1.6bn at end-2Q17. We make no changes to our earnings forecasts as we expect 4Q to recognise a slight loss. We maintain our HOLD call with a higher 12-month TP of RM0.81 based on a higher 0.5x P/BV (from 0.45x), -1SD of its 5-year average forward PE (Fig 4). A key upside risk to our view would be a recovery in the industry capex cycle leading to more projects being sanctioned. Downside risks would arise from further deferments in capex spending, margin deterioration, and execution hiccups.

Source: Affin Hwang Research - 1 Nov 2017