Despite incurring losses in 1Q18, we expect MHB to record stronger results in 2H18 underpinned by pick-up in both heavy engineering and marine segments. All in, with no changes in our estimates, we maintain MP call on the stock with unchanged TP of RM0.820 pegged 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.

Deemed within expectations. After stripping off RM2.7m unrealised forex gain and RM2.8m allowance for impairment loss on trade receivables, MHB booked in RM25.2m core net losses in 1Q18. It is still deemed within expectations even though we/consensus are forecasting full-year net profit of RM30.6m/RM34.7m in view of a potentially stronger 2H18 backed by improvement from both marine and heavy engineering segments. No dividend was declared as expected.

Weaker both QoQ and YoY. In tandem with 24% QoQ drop in revenue, MHB turned into the red from core net profit (CNP) of RM46.3m in 4Q17. The weaker performance was largely due to weakening of heavy engineering segment, which turned to losses led by the absence of variation orders and lower billings as a result of project completions coupled with weaker marine services (RM7m losses vs. RM12m profit; less LNG vessels repair works). YoY, the losses reversed from a marginal breakeven level of RM42k profit due to poorer performance from marine segment but were offset by narrowing losses in heavy engineering segment.

RM2.8b tender-book. Order-book fell to RM1.2b from RM1.3b in 4Q17 without major contract win during the quarter. Its current tender-book has been reduced to RM2.8b from RM4.0b of which c.46% 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.

Maintain FY18-19E earnings. Despite incurring losses in 1Q18, we believe MHB should be able to record stronger performance in 2H18 backed by; (i) higher billings from Bokor project starting from 3Q18, and (ii) pick-up in marine segment with more LNG vessel repair work, which typically fetch higher margins. Thus, we are maintaining our FY18-19E earnings, assuming RM500m contract win per annum.

Reiterate MARKET PERFORM. MHB’s net cash position deteriorated to RM514.5m this quarter from RM675.0m in 4Q17, which is equivalent to 32.0 sen/share largely due to payment to creditors and capex incurred for dry dock 3. All in, we maintain MARKET PERFORM with unchanged TP of RM0.820 pegged to FY18E PBV of 0.5x which is below the -1.0SD 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 - 7 May 2018