We believe the formation of a JV company with EPIC will help MHB establish a recurring income stream from marine repair through capitalising on work opportunities along the East Coast. However, near term earnings impact could be muted given limited capacity of its newly acquired floating dock and potential start-up cost. All in, we made no changes to our FY16-17E earnings and retained MARKET PERFORM call with TP at RM1.25 pegged to 0.7x CY17 PBV.

Entered JV agreement with EPIC. Yesterday, MHB announced the establishment of a joint-venture company with Eastern Pacific Industrial Corporation Bhd (EPIC) to provide marine repair services such as dry-docking repair, refit and refurbishment. MHB is the majority shareholder with 70% stake with EPIC having the remaining stake in the JV company. Apart from the RM7.0m cash consideration to subscribe 7.0m shares of the new JV company, MHB is looking to inject another RM29.0m for further capex and working capital purposes.

Leveraging on EPIC’s facilities in Kemaman. We are slightly positive on this JV as it is in line with the company’s strategy to establish stable recurring income from marine repair business. Through the JV, MHB can leverage on EPIC’s integrated facilities in Kemaman, Terrengganu to provide repair services vessels along the East Coast. Given the limited capacity, we believe the focus should be on smaller-sized offshore support vessels.

Acquired floating dock. MHB and EPIC acquired a floating dock from Yeisu Ocean Co Ltd, South Korea in mid-July this year and the c.5,000 tonne floating dock has been delivered to Kemaman, Terrengganu at the end of last month. Based on our ballpark estimates, assuming 80% utilisation, we anticipate the JV company will contribute RM25.0m revenue per annum (approximately 2.2% of our FY17E forecast). Thus, the earnings impact is expected to be minimal to MHB at RM1.7m per annum, 2.2% of our FY17E forecast, assuming 10% net margin.

Order book replenishment risk persists. MHB’s order book remains at RM1.0b in 2Q16, similar to 1Q16 but slightly lower than the RM1.1b level as at Dec 2015 after the inclusion of new contracts, spanning up to 2017. We understand that clients have continued to put on hold new projects even though tenders have been submitted. MHB only managed to secure RM57m in 2Q16, largely for RAPID packages. Tender book is worth RM7.4b of which RM1.75b are tenders submitted for 2016. Management is eyeing to secure more RAPID packages from its tender of RM425m in 2H16. We maintain our FY16-17E earnings forecast as the JV company will only commence operations by next year and the earnings contribution will be minimal, potentially offset by start-up cost.

Maintain MARKET PERFORM. MHB’s cash-in-hand dropped to RM805.4m as of 2Q16 from RM922.8m in 1Q16 largely due to settlement of payables. Management is cautious on cash usage in view of the uncertain contract awards. Nevertheless, we do not discount the possibility of dividend pay-out to reward shareholders if MHB decides to fund its new dry dock through a sukuk issuance and there is no other major capital expenditure apart from the new dry dock in the near term. Our TP is retained at RM1.25 pegged to 0.7x CY17 PBV.

Downside risks to our call include: (i) weaker-than-expected project wins, (ii) weaker-than expected margins, and (iii) lower contract replenishment

Source: Kenanga Research - 17 Aug 2016