• Heavy engineering and marine businesses saw activities recover strongly in 3Q20 after the lockdown. Revenue increased 45% qoq, returning to profit
• Results Are Within Our Expectation
• Maintain our Sell rating with a lower target price of RM0.29 (pegged to a lower 0.2x P/BV). Until we see a clearer signal of capex recovering, we recommend that investors stay away from this heavily capex-dependent business

Commendable But in Line

3Q20 reported a headline profit of RM2.6m (compared to a RM4.7m loss in 3Q19). After stripping out the forex element, core profit came in at RM3.3m, reversing from the previous quarter’s loss. While the total loss narrowed to RM96m, this was still significantly higher than the 9M19 loss of RM52m, hit by the COVID pandemic. Nonetheless, the results are in line with our expectation.

3Q20 Saw Activities Recover to Pre-COVID Levels

Both heavy engineering and marine segments saw activities pick up in 3Q20, following the 20-day yard closure during the MCO period in April 2020. MMHE turned around from a core loss of RM81m to a profit of RM3.3m, with revenue staging a strong recovery, increasing by 45% qoq. Net cash declined by 6% to RM409m in 3Q20.

Tender Market Still Looking Quiet

Given the lacklustre environment where a lot of tenders are being put on hold, the remaining order book of RM2.5bn (2Q20: RM2.6bn) will slowly be depleted, and MMHE has only secured a mere RM0.6bn in new jobs ytd. The amount of tenders put through by MMHE as of September 2020 was relatively unchanged qoq at RM12.3bn (2Q20: RM12.5bn), reaffirming our existing view that clients are still cautious on spending. Its Kasawari EPCIC project is now 23.2% completed, while Bokor CPP has sailed away in August 2020.

Maintain Sell

Our investment thesis remains unchanged. Though sitting on RM409m of net cash, or RM0.23/share, the risk of cash depletion is real especially with the near-term operating environment not in the fabricators’ favour as global oil majors remain cautious on capex spending. Maintain Sell with a lower target price of RM0.29, pegged to a lower 0.2x (from 0.25x) 2021E P/BV. Risks include higher execution margins, and potential big variation in orders to be recognized that could boost earnings

Source: Affin Hwang Research - 28 Oct 2020