MMHE’s core loss narrowed in 2Q19, but the result was still a miss. The smaller loss was mainly driven by a RM20m variation order recognition, and further supported by a recovery in marine activities which led the marine business unit (MBU) back to profit. We maintain our target price at RM0.83, reaffirming our HOLD rating.

Core Loss Halved as Revenue Grew 17%

1H19’s revenue grew 17% yoy to RM480m on the back of higher progress billings from heavy engineering and MBU activities. This contributed to its core losses narrowing to RM43m (from RM87m in 1H18), aside from a large variation order in 2Q. Nevertheless, results still proved to be disappointing due to stubbornly low margins for the heavy engineering unit, which made up 58% of 1H19 revenue.

MBU Back to Profit in 2Q19

The marine business swung back into profit in 2Q19, after 5 consecutive quarters of losses, as revenue increased by 46% yoy. This was attributable to the higher dry-docking activities on LNG carriers and the refurbishment of Velesto Energy’s Naga 2 and 5 drilling rigs. 2H19 pipeline looks promising as MMHE expects activities to pick up strongly, supported by vessel upgrading works and retrofitting to comply with IMO2020 regulation, and as rig orders increase.

Order Book Saw a Boost From Recent Kasawari Project

The current outstanding order book saw a big jump to RM3bn (from March 2019 of RM864m) following the recent Kasawari contract being secured. The project is expected to have its first steel cut by early-2020, and to be completed in 40 months. The Bokor CPP project, currently the biggest portion of its order book is now 59% completed (from 49.4% in March 2019) is targeted to complete by mid 3Q20.

Maintain HOLD

We widen our FY19E loss to RM37m (from RM27m) as we impute in a lower margin for the heavy engineering segment. 2H19 could potentially see more variation orders recognised, contributing to narrower losses. We reaffirm our Hold rating with an unchanged target price of RM0.83, pegged to 24x 2020E EPS. Risks include weaker/higher execution margins, and potential big variation orders to be recognized that could boost earnings.

Source: Affin Hwang Research - 5 Aug 2019