MMHE continued to report a weak set of numbers, albeit with core losses narrowing in 4Q18. FY18 headline losses amounted to RM123m, which came in larger than both street and our expectations. The culprit of this weak performance was the marine segment falling into deeper losses due to the impact of a series of cost provisions. Heavy engineering posted a better quarter, but was adversely affected by the weaker marine performance. Maintain our HOLD rating with our target price at RM0.61.

Weaker Marine Division Although Heavy Engineering Returned to Profit

After stripping out the one-off impairment charge, 4Q18 core losses narrowed to RM8m, lifted by the better heavy engineering segment on the back of higher recognition from ongoing projects. Nevertheless, the continuous deferment in client dry-docking activities and lack of high margin jobs impacted results, which saw marine revenue falling by 56% and losses widening to RM33m (from 3Q18 losses of RM16m).

Turning More Conservative on Marine Segment

We lower our FY19-20E profit forecasts to adjust for the lower revenue and margins for the marine segment (from 18% to 16%), though we believe earnings would likely turnaround as the Bokor CPP has achieved the threshold to start profit recognition at 36.7% completion, and outstanding variation orders on RAPID jobs should give a boost to earnings. The order book as of December 2018 was lower at RM826m (vs. RM932m in 3Q18).

Maintain HOLD

While we are projecting an earnings turnaround in FY19, we maintain what we believe to be a conservative approach and continue to value the company using the P/BV method. We lower our 12-month TP to RM0.61 (from RM0.62), based on an unchanged 0.4x multiple. We maintain our HOLD call being cautious over the uncertain near-term outlook as the Kasawari CPP project, for which MMHE is reported as front runner, continues to face delay. Upside risks: potential new heavy engineering wins, recovery of marine cost provisions. Downside risks: continuous delays in client capex spending.

Source: Affin Hwang Research - 14 Feb 2019