We expect MHB to stay in the red for FY17 following the loss making 2Q17 in view of higher operating losses from its offshore segment. No reprieve in the near-term earnings outlook given that tender book has been slashed to RM1.9b despite improving order-book post the EPCIC of Bokor’s CPP contract win. In all, we maintain UNDERPERFORM call on the stock with a lower target of RM0.65 in view of limited job prospect within the fabrication space given cautious capex spending from oil majors.

Below expectations. MHB booked in core net loss of RM9.8m, falling below our and consensus expectations of net profit forecasts of RM10.9m and RM22.1m, respectively, after stripping off RM17.7m unrealised forex loss and losses in fair value of hedging instruments amounting to RM2.9m. The disappointing results were largely due to weaker-than-expected contribution from offshore segment. No dividend was declared as expected.

A loss-making quarter. Despite revenue improving by 9% QoQ, MHB slipped into core net loss (CNL) of RM9.8m in 2Q17 from a barely breakeven level of RM42k in 1Q17, largely dragged by: (i) higher operating costs, (ii) higher JV losses, and (iii) higher tax expenses. YoY-wise, in tandem with 14% drop in top-line, the loss making 2Q17 against RM10.9m core profit posted in 2Q16 was mainly because of: (i) weaker contribution from offshore segment resulting from completion of major projects, and (ii) absence of one-off income from the settlement of a legal case. Cumulatively, MHB also recorded RM9.8m CNL in 1H17 from a profit of RM40.8m no thanks to weakening contribution from both offshore and marine segments following delivery of F12 Kumang, Baronia and Besar as well as less number and value of LNG repairs.

Tender now at RM1.8b. Order-book improved to RM1.6b from RM1.0b after the contract win of EPCIC of CPP for the Bokor Phase 3 ReDevelopment Project amounting to RM1.0b in April this year. However, MHB’s current tender had dropped more than half to RM1.8b from RM4.5b where the focus should be on the developing onshore construction and fabrication work for RAPID and the maintenance contract of the mega project subsequently.

Expecting FY17 to stay in the red. As the RM1.0b Bokor project will only commence its first steel cut in FY18, we estimate MHB to stay in the red with losses of RM19.8m in FY17 (against previous earnings profit estimate of RM10.9m), factoring lower contribution from offshore segment. We also slashed FY18E earnings by 15% to RM21.8m after tweaking down its offshore project margins.

Keep UNDERPERFORM. MHB’s net cash position improved slightly to RM662.3m this quarter from RM644.7m in 1Q17, which is equivalent to 41.0 sen/share. However, we expect its cash-in-hand to fall substantially in the next few years given that the construction of its new drydock construction plan will start in September 2018. Following the earnings cut, we maintain our UNDERPERFORM call on the stock with lower TP of RM0.65 from RM0.80 previously pegged to unchanged FY18E PBV of 0.4x which is below the -1.0 S.D. to its average mean valuation. 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 - 4 Aug 2017