MMHE’s 2Q18 was hit with a series of cost provisions at both its heavy engineering and marine business, which resulted in overall losses widening to RM49.5m. The results missed our and consensus estimates. We cut our FY18 forecasts to a loss, and remove our earlier dividend payout assumption. We lower our TP to RM0.70 (from RM0.80) and downgrade the stock to a SELL, as 2H18 earnings momentum may not be as strong as earlier anticipated due to delays in the Bokor project. From a balance-sheet perspective, MMHE’s results were commendable with its cash balance increasing by RM47m due to better working-capital management.

Earnings Missed Expectations

MMHE’s 2Q18 losses widened to RM49.5m, receding more than 2-fold yoy and losses almost doubling qoq. After excluding the RM5m unrealised forex gain and RM6.8m reversal of trade receivables impairment, core losses in 2Q18 further widened to RM61m. This brings cumulative 1H18 core losses to RM87m vs. RM10m in 1H17. Earnings missed our and consensus estimates by a huge margin due to the higher-than-expected cost provisions related to the RAPID project, Benchamas and Bergading FSO, as well as from weaker marine activities.

Total Variation Orders Amounted to ~RM30m

Heavy engineering reported a 24% increase in revenue qoq, but saw losses widen from RM12.8m to RM24m. Marine revenue was up 11% qoq; however, losses widened from RM7m to RM26m. Both of the larger losses were a result of cost provisions recognised, which added up to ~RM30m. Management sounded cautious over a full recovery by end-2018, mirroring our stance.

Bokor Earnings Looking Negligible in FY18

Based on MMHE’s square profit recognition method, most of the EPCIC profits are back-loaded towards the second half of the project. In the case of Bokor, profit recognition will only begin after achieving the 25% milestone. This is likely to be pushed back from the initial 3Q18 timeline to 4Q18 as management guided that Bokor will only hit slightly over 25% by end-2018.

On the Flipside, Tenders Increased by 54%

MMHE’s tender book has increased by 54% from RM2.8bn in March 2018 to RM4.3bn as of June 2018. This has yet to include the Kasawari CPP project, which we understand falls part under the separate RM2.7bn prospective tenders. Nevertheless, the higher tender book signals a recovery in industry capex in view of the rising oil prices of late. However, the timing of awards remains uncertain.

Bokor CPP Makes Up Bulk of Order Book

MMHE’s current outstanding order book has fallen from RM1.22bn to RM1.14bn qoq on the back of a lack of replenishment and the ongoing burn rate. The Bokor CPP project, valued at ~RM1bn, currently makes up the bulk of the order book.

Construction of Dry Dock #3 on Track

The expansion of Dry Dock #3 (DD3) is progressing as planned, achieving 30% completion as of June 2018 and is targeted for completion by 2Q 2020. This DD3 will allow MMHE to expand its marine capacity, which will enable it to cater to vessels up to 400,000 DWT, equivalent to the size of 3 oil rigs, 1 LNG carrier or 1 unit of FSO/FPSO.

Revising Down FY18 to a Loss

We cut our earlier RM25m profit in FY18 to a RM48m loss. This reflects a couple of changes: i) delay in the Bokor project profit, and ii) partial recovery in the cost provision recognized. The negative impact will be partly offset by better-than-expected marine activities towards the 2H18, which will likely narrow the current losses. We also removed our earlier dividend payout possibility in anticipation of the expected losses. We make no changes to our FY19-20E earnings.

Tactically Downgrade to SELL; TP Lowered to RM0.70

We tactically downgrade the stock to a SELL rating (from HOLD) in view of the heightened uncertainty in the coming quarters. We lower our target price to RM0.70 (from RM0.80) based on lower 0.45x P/BV (from 0.5x).

Risks to Call

Key upside risks include earlier Bokor CPP profit recognition, a narrowing of marine business losses, and a faster recovery in cost provisions recognised.

Source: Affin Hwang Research - 2 Aug 2018