Despite 3Q18 core net loss narrowing 68% qoq, this was nevertheless worse than anticipated. Marine segment remains in losses as MMHE suffered higher costs from conversion works and lower margins from dry docking works. On the flipside, Bokor CPP has achieved the 25% milestone earlier than guided, which leads us to believe that the upcoming 4Q18 results should see the heavy engineering division improving. This, coupled with the tax credit expectation should help to reduce the cumulative 9M18 loss. Upgrade to HOLD but with a lower target price of RM0.62.

Earnings Missed on Wider Marine Losses

MMHE reported RM22.7m headline net loss in 3Q18. Excluding RM4.5m trade receivable impairment loss and RM0.7m disposal gain, core net loss came in smaller at RM19.4m, bringing cumulative 9M18 net loss to RM106m. The deviation in 3Q18 against our forecast was due to unexpected losses at the marine segment, which we suspect also included the provision of FSO Bergading, a dispute with EA Technique.

Order Book Declined, Construction of Dock #3 on Track

Current outstanding order book declined to RM932m (2Q18: RM1.14bn), mostly made up of CPP Bokor. Meanwhile, the dry dock 3 expansion is progressively well at 41.3% (vs. 30% as of June-18), on track for completion by 2Q2020.

Tax Credit and Bokor Profit Should See 4Q18 Returning to Black

We widen our FY18 net loss forecast, and lower our FY19-20E earnings forecasts by 26% and 10%, respectively, on more conservative margin assumptions. We expect 4Q18 to return to profit, lifted by tax credit as well as the fact that Bokor CPP has crossed the 25% project completion, earlier than previous quarter’s guidance, allowing it to commence profit recognition.

Upgrade to HOLD

We lower our target price to RM0.62 (from RM0.70), pegged to a lower 0.4x P/BV multiple (from 0.45x) as we believe the fluctuation in marine losses still warrants a closer look. With a small potential upside to our target price, we upgrade MMHE to a HOLD. Upside risks: potential new heavy engineering wins, recovery of marine cost provisions. Downside risks: continuous delays in client capex spending.

Source: Affin Hwang Research - 26 Oct 2018