9M16 results were disappointing dragged by unexpected loss of RM1.8m in 3Q16 arising from weaker offshore contribution. Post FY16-17E earnings cut of 43-51%, we decided to lower our PBV valuation to 0.6x, which is still in line with average sector valuation (from 0.7x previously) due to: (i) weaker earnings outlook, (ii) higher impairment risk, and (iii) weakening cash position. All in, we maintain MARKET PERFORM on the stock with lower TP of RM1.04/share.

Below expectations. MHB’s 9M16 core net profit (CNP) of RM38.9m came below expectations, accounting for only 48%/53% of our/consensus full-year forecasts. The disappointment was largely due to weaker-than-expected contribution from offshore segment. No dividend was declared as expected.

Down QoQ but up YoY. Despite a 12.1% QoQ growth in revenue, MHB recorded core net loss (CNL) of RM1.8m in 3Q16, from a net profit of RM10.9m in 2Q16, after stripping off unrealised forex loss of RM2.7m. The poorer performance was largely due to widening losses from offshore segment in the absence of approved variation orders for Malikai recognised in the previous quarter but was offset by better contribution from marine segment led by both higher top line and stronger margins. YoY, MHB managed to narrow its RM24.8m losses in 3Q15 due to lower provisioning. Recall that an additional provision was also made for its Malikai TLP project which nudged the offshore segment into an operating loss of RM28.2m in 3Q15. Cumulatively, 9M16 core net profit improved 50.7% YoY thanks to the abovementioned reason.

Order book replenishment risk persists. Order book fell to RM686m in 3Q16 from RM1.1b in the previous quarter, implying that MHB did not secure any new contract during the quarter. This is worrying given that it provides minimal earnings visibility for its offshore segment. With its continuous decreasing yard utilisation, we do not discount the possibility of impairment in the coming quarters. We understand that clients have continued to put on hold new projects even though tenders have been submitted. 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 RM500m within the next six months.

Slashed order book replenishment. In view of slower contract award due to wait-and-see attitude of oil majors, we cut FY16E/FY17E earnings downwards by 43.2%/50.6%, imputing slower revenue recognition from offshore division.

Maintain MARKET PERFORM. Cash-in-hand has dropped to RM686.1m as of 3Q16 from RM805.4m in 2Q16. Management remains cautious about its cash utilisation in view of the uncertain contract awards. In view of no improvement in offshore segment leading to lower yard utilisation as well as lower cash-in-hand, we reduce our TP to RM1.04 from RM1.25 previously pegged to lower CY17 PBV of 0.6x (from 0.7x), which is in line with the sector average valuation.

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

Source: Kenanga Research - 28 Oct 2016