• 6M20 core loss widened to RM105m (2Q20: -RM81m) vs our previous full-year profit forecasts of RM15m and consensus profit of RM19m
• Project a 2020 loss from earlier profit, and cut 2021-22E EPS by 18-39% after taking into account the lower margins and order book replenishment
• Maintain Sell as we lower our target price to RM0.36 (from RM0.45)

MCO saw yard closure and affected earnings

2Q20 revenue slumped 44% yoy to RM155m impacted by the suspension of its Pasir Gudang yard during the MCO period, which saw heavy engineering and marine revenue declining by 26% and 65%, respectively. This resulted in LBITDA widening to RM68m. After stripping out the RM312m asset and trade receivable impairment, core net loss stood at RM81m vs -RM9m in 2Q19. MMHE also made a separate RM90m provision on the additional costs expected to incur due to delay in project execution, higher equipment rental fees and sub-contractor claims. We are of the view that claiming these from clients would be challenging under this fragile environment, as such we have not stripped out such provisions in deriving our core bottom line.

No visibility on new contracts despite sizeable tender book

No material changes in terms of current outstanding order book, currently at RM2.6bn (1Q20: RM2.7bn). Two of MMHE’s largest projects in hand – Kasawari and Bokor – are now at 16.6% and 77.5% completion respectively. While the tender book remains sizeable at RM12.5bn, the time line of the award is the biggest uncertainty under the current low oil-price environment.

Cut our 2020-22E earnings forecasts

We slash our earlier 2020 profit assumption to a loss taking into account the delay in work progress, additional costs as a result of the yard suspension, and assume lower RM100m new contract wins (vs RM500m previously). 2021-22E EPS is cut by 18-39% after imputing lower margins and cutting our earlier order book replenishment target to RM300m in 2021 (from RM500m).

Maintain Sell

Although MMHE is sitting on RM433m net cash, or RM0.27/share, representing 71% of its market cap, with global oil majors and Petronas cutting capex, fabricators like MMHE and Sapura Energy (SAPE MK, RM0.11, Sell) would be the more severely impact segment with slower contract roll outs. Given the lack of near-term catalysts, we maintain our Sell rating as we downgrade our P/BV multiple to 0.25x (from 0.3x) to reflect the weak environment and lower our target price to RM0.36 (from RM0.45).

Source: Affin Hwang Research - 24 Jul 2020