MMHE’s 4Q19 results beat expectations, with core net profit soaring to RM12.8m (3Q19: RM0.9m) mainly contributed by a RM20m variation order claim and a RM6m IRB tax refund. 2019 EBITDA swung back to the black while operating cash flow jumped 92% yoy. No dividend was declared, for the second year. We upgrade MMHE to a Hold (from Sell) on valuation grounds as the share price has fallen by 14% over the past three months. We lower our target price slightly to RM0.82 as we have switched our valuation method.

Results Beat Expectation

2019 core loss narrowed 75% yoy to RM29m (2018: -RM115m) as revenue increased by 4%, accompanied by a 5% decline in operating cost and a RM6m tax refund during the year. The smaller loss was also attributable to a total of RM40m variation orders that were recognized in 2Q19 and 4Q19. 2019 EBITDA margin came in at 3% (vs. negative in 2018). Revenue-wise, 2019 growth was supported by a better marine segment performance with more dry dock and conversion work for LNG carriers, offsetting the heavy engineering segment’s decline as earlier projects had reached their end and new projects were still at their early stages.

4Q19 Operating Profit Back to Black

EBITDA margin was relatively flat qoq at 8.5%, however net profit jumped, largely driven by RM20m of variation orders recognized and a positive impact in relation to the tax refund by IRB for the year of assessment 2017 amounting to RM6m.

Order Book / Dry Dock #3 Progress

With the recent contract win of the 2 Bekok wellhead platforms from Petronas Carigali and Mercury removal unit (MRU) for Hess’ Bergading project in Dec-19, MMHE’s order book has risen to RM2.96bn, as compared to RM2.7bn in 3Q19. 70% of the order book comprises of the Kasawari Central Processing Platform and Wellhead Platform (WHP) project, which is currently at 4.6% completion. Bokor’s topside has achieved 73% project progress and is targeted to be completed by 3Q21. Construction work for the dry dock 3 expansion is 86% completed and it will commence operation in 2Q20.

Cutting Our Profit Forecast

We cut our FY2020-21E earnings by 74% and 46% mainly to factor in lower contribution from the Kasawari project, which makes up ~70% of the current order book. Physical construction work is expected to commence in March 2020 and targeted to be completed by 1H24. With MMHE’s prudent accounting policy to backload earnings for most of its EPCIC projects, we expect minimal contribution from the Kasawari project in 2020.

Upgrade to Hold

We now use a P/BV valuation methodology (from PER), as we believe earnings risk remains with major projects still at an early stage of execution. We set a target P/BV of 0.55x, equivalent to its 5-year mean, resulting in a slightly lower target price of RM0.82 (previously RM0.83 based on a 2020E PER of 24x). Key risks to our call: better or worse-thanexpected project execution and margins.

Source: Affin Hwang Research - 13 Feb 2020