Difficult Environment to be in

• 4Q20 results missed both our and consensus estimates, as deviation arose from higher-than-expected costs
• Heavy engineering saw resumption of activities, but bogged down by additional cost provisions and unabsorbed overheads relating to COVID19
• Offshore fabrication space looks challenging. Recommend investors to stay away from this space until clearer signs of capex recovery. Reiterate Sell with an unchanged target price of RM0.29

Dragged by Higher Provisions and Costs Despite Higher Revenue

MMHE swung back into loss in 4Q20. After adjusting for a RM0.4m forex loss, RM3.1m disposal gain and RM3.4m impairments on trade receivables, core loss widened to RM8m (vs RM0.3m core loss in 4Q19). Full-year 2020 core loss of RM104m came in closer to our projected RM93m loss, vs consensus’ smaller loss of RM74m. Heavy engineering revenue increased 3x yoy to RM595m with yard utilization now at 43%; however, losses doubled to RM24m as it incurred more cost provisions and higher unabsorbed overheads relating to COVID19. Marine revenue fell 21% yoy to RM101m as yard shutdowns during MCO had delayed clients’ dry-docking activities, but profit rose on the back of better work margins.

Heavy Engineering Replenishment Dried Up

As of end Dec 20, outstanding order book depleted to RM1.9bn (3Q20: RM2.5bn), having not secured any new heavy engineering jobs in 2020 as compared to RM3bn in 2019. Tender book remains relatively similar at RM12bn (3Q20: RM12.3bn), signaling client cautiousness on new projects. The Kasawari EPCIC project, being the single largest project in the order book, has reached 30.4% completion.

Outlook Little to be Excited About

The recently released Petronas Activity Outlook report painted a muted outlook on the offshore fabrication segment. The number of wellhead platforms (WHP) to be awarded is estimated to fall from 7 units in 2020 to 6 units in 2021, before falling drastically to 1-3 units in 2022. On the larger value central processing platform (CPP), 2021 is expected to see 1 unit, similar to 2020, but zero for 2022.

Maintain Sell

On the back of a murky outlook locally and clients’ cautious capex spending, we reiterate our Sell rating on MMHE until we see signs of capex recovery. No changes to our target price at RM0.29, pegged to 0.2x 2021E P/BV. Upside risks include higher execution margins, and potential large order variations that could boost earnings.

Source: Affin Hwang Research - 10 Feb 2021