Despite 3Q17 results coming in strongly which was helped by higher-than-expected variation orders (VO), we believe such VOs are likely to taper in 4Q17 and the near-term outlook could still be challenging in view of limited job prospect within the fabrication space given cautious spending from the oil majors. All in, we narrow our losses forecast for FY17 factoring additional variation orders but maintain UNDERPERFORM call on the stock with unchanged TP of RM0.65 peg to 0.4x FY18E PBV.

Above expectations. 9M17 core net profit (CNP) of RM7.6m came above expectations against our and consensus full-year loss estimates of RM19.8m and RM7.8m, respectively. The surprisingly strong results were largely due to stronger-than-expected contribution from offshore segment. No dividend was declared as expected.

Unexpected strong quarter. Despite revenue decreasing by 16% QoQ, MHB recorded CNP of RM17.3m from core net loss (CNL) of RM9.8m in 2Q17, largely helped by narrowing losses to RM2.1m from RM22.7m in 2Q17 for its offshore segment as a result of the completion of two RAPID projects and recognition of additional variation orders from Gumusut Kakap and Malikai projects. YoY-wise, even though revenue dropped by 35%, MHB managed to return to the black from slight core losses of RM1.8m in 3Q17 thanks to narrowing losses from offshore segment offsetting poorer performance of marine segment (- 18%). Cumulatively, CNP still tanked 81% to RM7.8m in 9M17, no thanks to weakening contribution from both offshore and marine segments (-22%) following delivery of F12 Kumang, Baronia and Besar as well as lower numbers and value of LNG repairs.

Seeking jobs outside Malaysia. Order-book fell to RM1.4b from RM1.6b without major contract win during the quarter. However, MHB’s current tender increased to RM4.2b from RM1.8b in the previous quarter, of which more than half was related to overseas projects, including onshore process modules jobs in North America and the Middle East. Meanwhile, MHB is also eyeing on the EPCC job in Pegaga as well as maintenance jobs in the local scene.

Expecting lower losses in FY17. With the higher-than-expected recognition of variation orders in 3Q17, we narrow our losses estimate to RM3.1m against the previous loss estimate of RM19.8m in FY17 with the anticipation of a weaker 4Q17 potentially dragged by weaker offshore segment in the absence of variation orders.

Keep UNDERPERFORM. MHB’s net cash position deteriorated to RM614.9m this quarter from RM662.3m in 2Q17, which is equivalent to 38 sen/share. However, we expect its cash-in-hand to fall substantially in the next few years given the construction of a new drydock construction which will start in September 2018. Despite slight earnings upgrade, we maintain our UNDERPERFORM call on the stock with unchanged TP of RM0.65 pegged to 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.

Source: Kenanga Research - 1 Nov 2017