FY17 results coming in strongly, which was helped by higher-than-expected variation orders (VO) and tax credit. A 3.0 sen DPS was also a positive surprise to us. After increasing FY18E earnings by 40%, we upgraded MHB to MP call with higher TP of RM0.820 pegging to 0.5x FY18E PBV in view of improving outlook in the medium term. The counter could be a laggard play due to its strong balance sheet, with preferred entry level at RM0.650.

Above expectations. FY17 core net profit (CNP) of RM53.9m came above expectations against our and consensus full-year loss estimates of RM3.1m and RM3.9m, respectively. The surprisingly strong results were largely due to: (i) stronger-than-expected variation orders from heavy engineering segment, and (ii) unexpected deferred taxation credit. A DPS of 3.0 sen was declared, which was also a positive surprise to us.

Unexpected strong quarter. MHB’s CNP jumped by 1.7x QoQ to RM46.3m in 4Q17, largely helped by stronger heavy engineering segment, which returned to a profit of RM11.3m from RM2.1m losses in 3Q17 and higher tax credit (RM20.9m vs. RM0.4m in 3Q17). We understand that the stronger heavy engineering segment was due to recognition of additional variation orders from the completed projects such as SK316 and Malikai projects. YoY, even though revenue dropped by 18%, MHB managed to return to the black from core losses of RM40.3m in 4Q17, thanks to better heavy engineering segment offsetting poorer performance of marine segment (-76%). Cumulatively, CNP also booked in CNP of RM53.9m in FY17 from a slight loss of RM1.4m a year ago, mainly driven by narrowing losses from heavy engineering segment, led by recognition of variation orders and RM21.4m tax credit (vs. RM12.8m tax expense). This helped to cushion weaker marine segment (-40%) which had a lower number of vessel repaired in FY17.

Tender enquiries on the rise. Order-book fell to RM1.3b from RM1.4b in 3Q17 without major contract win during the quarter. Its current tender remained at RM4.0b of which c.80% are related to local projects. We gather that tender enquiries are on an uptrend but timing of award remains uncertain. The company will still focus on its existing core businesses while seeking floater conversion jobs internationally.

Increased FY18E earnings by 40%. With the higher-than-expected recognition of variation orders and higher tax credit, we increase our FY18E earnings by 40% to RM30.6m. Meanwhile, FY19 earnings estimate of RM45.2m (48% YoY growth) is introduced assuming: (i) RM500m order-book replenishment, and (ii) 10% growth in marine revenue.

Upgraded to MARKET PERFORM. MHB’s net cash position improved to RM675.0m this quarter from RM614.9m in 3Q17, which is equivalent to 42.0 sen/share. All in, we believe MHB should warrant a slight rerating from its trough valuation with better medium-term outlook. Thus, we upgraded the counter to MARKET PERFORM with higher TP of RM0.820 (from RM0.650 previously) pegged to FY18E PBV of 0.5x (from 0.4x) which is below the -1.0 S.D. of 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 - 8 Feb 2018