MHB posted wider-than-expected losses for FY18, dragged by deferment of dry docking activities in its marine segment, while its heavy engineering segment continued to be loss making. Meanwhile, with the Kasawari gas project reportedly being delayed, we see a potential risk in its tender-book, although FY19 is expected to see a recovery in earnings. Downgrade to MP, following recent share price rebound, with an unchanged TP of RM0.71.

Missed expectations. MHB recorded FY18 core net loss of RM122.6m, coming in above our/consensus loss projections by 8%/53% due to greater-than-expected losses from its marine segment. No dividends were declared, as expected.

Losses for the year. FY18 plunged into the red, from core profit of RM53.9m in the prior year, mainly dragged by losses from its marine segment due to heavy deferment of dry docking activities from the LNG vessels market during the year, while its heavy engineering segment also continued to remain in losses given cost recognition from key projects.

As for the individual quarter, YoY, 4Q18 similarly dived into losses of RM25.2m, from core profit of RM46.3m in 4Q17, on lower dry docking activities and lower heavy engineering earnings recognition. Sequentially, 4Q18 losses widened 11% QoQ on the back of higher marine losses from lower dry docking activities.

Possible tender-book risk, but earnings recovery likely. With the Kasawari gas project reportedly to be delayed, we see a potential tender-book risk for MHB. To recap, MHB was one of the favourites to land the EPCIC contract for the central processing platform (CPP) for the Kasawari gas project off Sarawak, which we believe contributes to the bulk of its tender-book, currently standing at around RM5.5b. Initially, the contract award was expected to be announced by 1Q19, but with its status still up in the clouds, we do not have any visibility on the issue at the moment. On a brighter note, we believe FY19 should likely to see an earnings recovery, driven by: (i) recovery in its marine segment given the heavy deferments of dry docking activities in 2018, and coupled with (ii) slight earnings recognition from construction progress of Bokor CPP.

Downgrade to MARKET PERFORM, with an unchanged TP of RM0.71, pegging to 0.5x PBV, which is derived based on our ROE- PBV study conducted in our oil and gas 1Q18 strategy report and also implies a PBV valuation that is close to -1S.D. from its historical average. Post-results disappointment, we slashed our FY19E earnings by 19% to account for weaker marine contributions, while also introducing our FY20E numbers.

Overall, we downgrade our call to MARKET PERFORM, with the share staging an impressive rally of over 30% to recover from its December low.

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

Source: Kenanga Research - 14 Feb 2019