• 1Q21 results negatively surprised with a big provision as the Bokor project, which sailed away in August 2020, experienced set-back in commissioning
• Operationally, both heavy engineering and marine businesses saw lower activities on a qoq basis
• We now assume FY21-23 to remain in losses on cost overruns due to project complexity. Lowering our target price to RM0.41 (from RM0.72) and downgrading to Sell given earnings volatility as a major risk. No sizeable near term contract catalyst expected after securing Jerun CPP

A Slow Quarter

MMHE reported a headline loss of RM104m as a result of the provision made for the Bokor project’s revised completion timeline. We gathered that the negative impact is c.80% of 1Q21’s heavy engineering losses, which translates to an estimated RM68m. The Bokor topsides sailed away back in August 2020, but has seen delays in offshore commissioning work which we gather requires additional rectification work. Excluding that and a RM1.8m forex gain, RM0.9m disposal gain and impairment write-back, core loss came in at a smaller RM40m – but still missed our/consensus expectations. 1Q21 was a slow quarter with revenue falling by 51% qoq, as heavy engineering revenue declined by 49% and marine business by a more drastic 61% qoq.

Order Book Back to June 2019 Level, After Securing Jerun

As of end March 2021, current outstanding order book grew to RM3bn after securing the RM1bn Jerun CPP project (target to complete by 1H24). The heavy engineering segment comprised 98% of the total order book with Kasawari making up the biggest bulk of the order book, after Jerun. This project has advanced to 38.9% completion (from 30.4% end December 2020).

Projecting Losses in Years Ahead; Lowering Target Price to RM0.41

On the back of our worries of further cost overruns given the project complexity, we now project FY21-23 to remain in losses (from our earlier profit assumption) after we slash our margin assumptions. After securing recent Jerun contract, we are not expecting MMHE to secure any sizable wins in the near term though its bid book is huge at RM7-8bn. Given the volatile earnings over the recent quarters and with no near-term new wins expected, we discount our earlier P/BV multiple to 0.3x (from 0.5x) and lower our target price to RM0.41 (from RM0.72). Upside risk to our call includes better execution margins, faster project progress, potential big variation orders to be recognized boosting earnings.

Source: Affin Hwang Research - 30 Apr 2021