1H18 losses of RM75m disappointed forecasts due to unforeseen losses from marine segment and minimal contributions from Bokor. For the remainder of FY18, we expect MHB to continue incurring losses, dragged by its heavy engineering unit but cushioned slightly by higher dry-docking activities from marine side. Downgrade MHB to UNDERPERFORM with a lower TP of RM0.695 (from RM0.820) as a turnaround might slower-than-expected.

Below expectations. 1H18 core net loss of RM75m was below ours and consensus profit projections of RM31m and RM25m respectively due to (i) unforeseen losses incurred at their marine division from lower-than-expected dry docking activities coupled with unanticipated upfront VO cost and (ii) wider-than-expected losses from its heavy engineering unit as bulk of its order book (Bokor) profit recognition is back loaded. No dividends declared as expected.

Weaker both QoQ and YoY. Despite the 19% higher revenue QoQ, 2Q18 core losses of RM50m widened 96% due to upfront VO cost incurred without accompanying revenues (pending client approval) at both HE and Marine segments from projects at: (i) Rapid, (ii) FSO Benchamas 2 and (iii) FSO Bergading. YoY, 1H18 losses widened 6x on reduced revenue (-17%) from lower heavy engineering projects at hand, less dry docking repair works and reasons mentioned above. We highlight that MHB’s clients had deferred dry docking activities due to the new International Maritime Org (IMO) regulations. The new regulations which imposed stricter sulphur oxide emission allowance by 1st January 2020 had put vessel owners in a dilemma whether to install scrubbers or burn cleaner fuel i.e. LNG. The contemplation between these two options which require modification and investment to their existing vessels had led to the deferment of dry docking activities.

FY18 to be subdued. Management indicated that Bokor EPCIC project is progressing ahead of schedule (at 15%) but profit recognition is minimal as profits are back loaded given that project risks are still high. Therefore, we foresee MHB’s heavy engineering unit to remain subdued for the rest of FY18 with contributions only kicking in from FY19, albeit minimal. While we expect dry docking activities to pick up from deferral in 1H18, we believe it would not be sufficient to reverse the losses already incurred. Currently, we gather that MHB has outstanding VO claims worth RM30m from RAPID, Benchamas 2 and Bergading pending approval from respective clients. While tenderbook has grown to RM4.0b (from RM2.8b in 1Q), MHB has yet to secure any contracts YTD (vs our replenishment target of RM500m).

Slashing FY18/19E estimates. Post results, we downgrade FY18 estimates to losses of RM78m (from profit of RM31m) to reflect (i) minimal profit contributions from Bokor, and (ii) lower dry-docking activities. Meanwhile, we also reduce our FY19 estimates by 35% on lower margin assumptions for its Bokor project. We also cautiously factored that MHB would successfully claim for VO on its FSO Benchamas 2 and Bergading project in FY18 but expect RAPID VO claims to be deferred as the project is still on going.

Downgrade to UNDERPERFORM (from MP) with lower TP of RM0.695 (from RM0.820) on lower FY18E PBV of 0.45x pegged to - 1.5SD (previously 0.5x PBV @ -1.0SD). Our downgrade is premised on (i) prolonged period of losses anticipated at its heavy engineering unit with longer than expected turnaround, (ii) bulk of RM1.1b orderbook is over reliant on its Bokor project (c.80%) which yields thin margins, and (iii) large tenders have yet to translate to awards. Risks to our call include stronger-than-expected contract wins/margins.

Source: Kenanga Research - 02 Aug 2018