MMHE turned in a small core profit in 3Q19, after excluding an unrealized loss and a disposal gain. Earnings were in line with our full-year loss forecast of RM37m, but missed consensus expectation of a narrower loss of RM9m for 2019. However, it is unclear at this juncture if the 3Q19 results were driven by one-off variation order claims. We maintain our target price at RM0.83, but downgrade the stock to a Sell as positives look priced in.

9M19 Losses Narrowed by 61%

9M19 losses narrowed by 61% yoy to RM42m (from a loss of RM106m) driven by higher revenue, lower costs and higher variation orders recognition. While the 9M19 operating margin for its heavy engineering segment is still weak (-2.2ppts yoy), the quarterly margin has improved from -19% in 1Q19 to -4.4% in 3Q19. In addition, the marine business has also returned to profitability driven by higher revenue from dry docking services for LNG carriers.

Sequential Improvement Seen

3Q19 swung back into a small profit from a RM10m loss in 2Q19, despite revenue declining by 8% qoq, driven by lower operating costs from the heavy engineering segment, which resulted in a 6.7ppts qoq improvement in the EBITDA margin.

Order Book Update

The current outstanding order book is slightly lower at RM2.7bn vs. RM3bn in Jun-19, mainly comprising the Kasawari CPP project. An additional 10% of works for the Bokor CPP was completed during 3Q, bringing overall project completion to 69%.

Downgrade Sell

We maintain our earnings forecasts as we expect MMHE to record another profit in 4Q. We downgrade to a Sell rating (from Hold) with an unchanged 12-month target price of RM0.83, based on a 2020E PER of 24x. Key upside risks include higher execution margins, and large variation orders to be recognized that would boost earnings.

Source: Affin Hwang Research - 25 Oct 2019