FY16 results were disappointing dragged by widening loss of RM40.3m in 4Q16 arising from weaker offshore contribution. Order-book level improved slightly QoQ, but earnings visibility risk remains apparent as new awards are on call-out basis. Following earnings cut on stubbornly high fixed overhead expense, we downgrade the stock to UNDERPERFORM with lower TP of RM0.96/share.

Below expectations. MHB recorded headline net loss of RM134.3m in FY16. After stripping off RM140.5m impairment on PPE and unrealized forex gains of RM7.6m, MHB booked in core net loss (CNL) of RM1.4m, falling below our/consensus expectations of net profit forecasts of RM45.9m and RM50.6m, respectively. The disappointment was largely due to weaker-than-expected contribution from offshore segment. No dividend was declared as expected.

Down both QoQ and YoY. In tandem with a 9.9% QoQ drop in revenue, MHB widened its core net loss (CNL) to RM40.3m in 4Q16 from RM1.8m in 3Q16, after excluding impairment on PPE of RM140.5m and unrealised forex gain of RM61.2m. The poorer performance was largely due to widening losses from offshore segment in the absence of order-book replenishment coupled with completion of major projects but was offset by better contribution from marine segment led by both higher top line and stronger margins. YoY, MHB sank into the red from a core net profit of RM57.3m in 4Q15 as a result of 58.3% decline in top-line. Cumulatively, FY16 core CNL slipped to RM1.4m from RM83.1m following a 52% plunge in revenue thanks to the abovementioned reason.

Order-book level improved slightly. Order-book increased to RM1.1b from RM686m in the previous quarter from both offshore and marine segments. However, earnings visibility risk for offshore segment persists as some jobs are on call-out basis. Current tender book stood at RM11.3b focusing on niche onshore such as RAPID related jobs and offshore (facilities improvement/ maintenance, HUC). Going forward, we expect contract flow to improve gradually.

Slashed earnings on fixed overheads. In view of stubbornly high fixed cost, we cut FY17E earnings downwards by 56.5% to RM16.8m. Meanwhile, FY18 earnings estimates of RM18.8m is introduced assuming: (i) RM600m order-book replenishment and (ii) 10% growth in marine revenue.

Downgrade to UNDERPERFORM. Cash-in-hand dropped marginally to RM671.1m as of 4Q16 from RM686.1m in 3Q16. Management remains cautious about its cash utilisation in view of the uncertain contract awards. Following earnings cut and impairment on PPE leading to lower book value, we downgrade our call to UNDERPERFORM with lower TP of RM0.96 from RM1.04 previously pegged to unchanged FY17 PBV of 0.6x.

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 - 08 Feb 2017