Following the disappointing 1Q17 results producing merely core net profit of RM42.0k, we downgraded MHB’s FY17E earnings by 35% in view of higher operating losses from offshore segment. Near-term earnings outlook remains weak despite order-book doubling to RM2.1b post EPCIC of Bokor’s CPP contract win. The stock remains an UNDERPERFORM with lower target of RM0.96 in view of limited job prospect within the fabrication space given tight capex spending from oil majors.

Below expectations. After stripping off RM11.2m unrealised forex loss and losses in fair value of hedging instruments amounting to RM5.4m, MHB booked in small core net profit of RM42.0k, falling below our/consensus expectations of net profit forecasts of RM16.8m and RM34.5m, respectively. The disappointment was largely due to weaker-than-expected contribution from offshore segment. No dividend was declared as expected.

A barely breakeven quarter. Despite a 22% QoQ drop in revenue, MHB managed to return to the black from core net loss (CNL) of RM40.3m in 4Q16. The better performance was largely helped by additional variation orders received from Malikai project but was offset by weaker performance from marine services in tandem with 37% drop in segmental revenue. YoY, MHB plunged to barely breakeven level from a core net profit of RM29.9m in 1Q16 largely due to poorer performance from marine services in the absence of settlement of prior years’ projects recorded in 1Q16 as well as widening losses in offshore segment despite successful delivery of F12, Besar and Baronia structures in 1Q17 resulting in 13% YoY increase in segmental top-line.

Tender book at RM3.4b. Order-book remained flattish at RM1.0b as of 1Q17. Recall that MHB recently secured the EPCIC of CPP for the Bokor Phase 3 Re-Development Project job amounting to RM1.0b. This has doubled the order-book to c.RM2.1b. Meanwhile, MHB’s current tender book stood at RM3.4b, of which RM1.7b is expected to be awarded in FY17. Meanwhile, MHB is also eyeing a portion of another Petronas’ project involving maintenance, construction and modification (MCM) with value of up to RM500m which could be out end of this quarter.

Slashed earnings on fixed overheads. In view of higher operating losses from offshore segment, we cut FY17E earnings downwards by 35% to RM10.9m. Meanwhile, we are maintaining FY18E earnings of RM25.5m with better projects line up going forward.

Keep UNDERPERFORM. Cash-in-hand continued to deteriorate to RM664.7m from RM671.1m as of 4Q16. Management remains cautious about cash utilisation in view of the uncertain contract awards. Following the earnings cut, we maintain our UNDERPERFORM call on the stock with lower TP of RM0.96 from RM0.97 previously pegged to unchanged FY18E PBV of 0.6x.

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

Source: Kenanga Research - 28 Apr 2017