1Q18: A Slow Start

MMHE’s 1Q18 losses widened by 52% yoy to RM25m, although this was largely anticipated. Both heavy engineering and marine revenue contracted due to the lack of sizeable jobs flow. However, we believe Bokor CPP (which comprises 80% of the total order book) progressing well at 10.2% completion will make up for the shortfall in 2H18, along with more progressive variation orders (VOs) and improving marine prospects. No changes to our earnings forecasts – we maintain HOLD rating and RM0.80 target price.

Results Within Expectations Amid Softer Earnings

1Q18 fell back into a loss of RM25.3m. Core net loss stood at RM25.7m, after excluding a RM2.7m forex gain and RM2.8m impairment charge on trade receivables. The results are deemed within our and consensus expectations as Bokor CPP and progressive VOs are expected to make up for the 1Q18 losses, alongside with better marine prospects. 1Q18 revenue fell 20% yoy, attributed to weaker heavy engineering (-28%) and marine (- 7%) performances. Heavy engineering saw a lower revenue due to new projects still at early stages of execution (Bokor) while executing on existing smaller-value projects (Sepat A and 4 RAPID packages). Marine segment saw clients deferring on their initial dry docking schedules.

Lower Sequential Profit

Aside from the fewer jobs in 1Q18, sequential earnings were also weaker as its 4Q17 performance formed a high base, lifted by high VOs for heavy engineering projects that were already completed. Tax credits also helped push earnings higher in 4Q17.

Order Book Is 4% Lower With Cash Down 24%

MMHE’s current outstanding order book stood at RM1.22bn, slightly lower than RM1.27bn as at end-2017. The cash balance declined RM160m during the quarter to RM515m due to the poor performance and RM30m of capex on the construction of dry dock 3. No changes to our earnings forecasts as we expect the remaining quarters to make up for the shortfall.

Maintain HOLD and Target Price of RM0.80

We maintain our HOLD rating and TP of RM0.80 (based on 0.5x P/BV). Key upside risks include any recovery in the industry capex cycle leading to more projects being sanctioned. Downside risks would arise from margin deterioration and execution hiccups.

Source: Affin Hwang Research - 7 May 2018