MHB posted wider-than-expected 9M18 losses, dragged by losses in its marine segment due to cost provisions in FSO Benchamas 2, coupled with dry docking deferments. Expect FY19 outlook to be better, driven by; (i) recovery in VO costs, (ii) increased dry docking activities, and (iii) profit recognition from CPP Bokor. Upgrade to MP with a lowered TP of RM0.64, with significant wins from tenderbook of RM6b as potential re-rating catalysts.

Missed expectations. MHB recorded core net loss of RM97.4m, missing ours and consensus full year loss projection of RM78.4m and RM30.9m, respectively, due to greater-than-expected losses from its marine segment. No dividends were declared, as expected.

Losses for the year. YoY-YTD, 9M18 plunged into losses from core net profit of RM7.6m in 9M17, dragged by its marine segment, which recorded losses of RM48.8m as compared to profit of RM40.7m, due to; (i) additional cost provisions incurred, mainly from VOs in FSO Benchamas 2, and (ii) deferments in dry-docking activities. Meanwhile, its heavy engineering losses narrowed by 16% YoY as key projects progress closer to completion.

As for the individual quarter of 3Q18, MHB registered core net loss of RM22.7m from core profit of RM17.3m in 3Q17, also mainly due to losses in its marine segment (RM16m losses versus RM17m segmental gain in 3Q17) for similar aforementioned reasons, coupled with widening losses in heavy engineering by 2.3x from greater cost recognition in CPP Bokor.

However, results improved on a sequential basis, with core losses narrowing by 54% QoQ, driven by; (i) narrowed losses in heavy engineering by 38% as key projects progress closer to finalisation during the quarter, and (ii) narrowed marine losses by 83% from greater cost provisions in the prior quarter.

Better outlook in FY19. Overall, MHB’s FY18 outlook has been plagued by losses in its marine segment due to costs provisions for FSO Benchamas 2, and deferments in dry-docking activities, while for its heavy engineering segment, costs are incurred for the progression CPP Bokor (currently at around 25%), but with minimal accompanying revenue as they are back-loaded to mitigate execution risks. As such, FY19 should pose a better outlook, driven by; (i) recovery of VO costs in Benchamas 2, (ii) pick-up in dry docking activities given this year’s deferments, and (iii) profit recognition from CPP Bokor, albeit at the later part of the year. Meanwhile, significant wins from its tenderbook of RM6b may serve as a re-rating catalyst, with CPP Kasawari a key project to look out for (current front-runners alongside SAPNRG), although execution remains the key. Post-results, we; (i) widened FY18E losses projection by 31%, while (ii) slashed FY19E earnings by 29%, after lowering our marine segment contributions.

Upgrade to MARKET PERFORM, from UNDERPERFORM previously,

given recent share price weakness, albeit with a lowered TP of RM0.64 (from RM0.695 previously) post-earnings downgrade, pegged to unchanged valuations of 0.45x PBV on FY19E at -1.5SD from the average, which is close to its historical low.

Risks to our call include (i) higher-than-expected marine activities, (ii) lower-than-expected costs in heavy engineering.

Source: Kenanga Research - 26 Oct 2018