Although losses widened, 1Q19 results are still broadly within expectations, in anticipation of a stronger 2H19 from higher dry-docking activities coupled with back-loaded fabrication profit recognition to lift the full-year to breakeven level. However, we believe its tender-book still faces some downside risks with the Kasawari project, believed to be the biggest slice in its tender-book, having been delayed. Maintain MP with TP of RM0.77.

Broadly within expectations. MHB recorded 1Q19 losses of RM29.4m, against our/consensus full-year profit forecast of RM14.5m/RM10.4m. Despite so, we deem the results to be broadly in line with expectations, in anticipation of a full-year breakeven driven by a stronger 2H19 from increased dry-docking activities coupled with profit recognition from its CPP Bokor project as its construction progresses further nearer completion (expected by 2020). No dividends were declared, as expected.

Widened losses. YoY, 1Q19 losses widened 17%, dragged by its heavy engineering segment as higher costs were being recognised due to greater project progression, while profit recognition are often back loaded into later phases. Similarly for QoQ, 1Q19 losses came in higher by 16% from 4Q18, with its heavy engineering segment similarly registering losses due to higher costs recognition. However, these were mitigated by narrowed losses from its marine segment as the quarter saw some increase in repair and maintenance works.

Expected breakeven this year. We believe an earnings recovery is likely this year, driven by: (i) recovery in its marine segment given heavy deferments in dry docking activities in the prior year, on top of the implementation of IMO2020, and (ii) back-loaded earnings recognition from the construction progress of CPP Bokor, which currently still contributes to the bulk of its order-book of RM864m. Meanwhile, its tender-book stands at RM6.3b, increasing from last quarter’s RM5.5b, from bids in both local and overseas.

However, we see some downside risk in the tender-book as the EPCIC for Kasawari central processing platform (CPP) which we believe makes up the largest tender portion is currently being delayed amidst political and environmental issues. On the bright side, should the project receives the greenlight, MHB is believed to the favourite against front-running contenders such as SAPNRG.

Maintain MARKET PERFORM. Post-results, we made no changes to our FY19-20E numbers, not taking into account any major wins. However, our TP has been slightly raised to RM0.77, from RM0.71 previously, as we roll forward our valuation base year to FY20E, pegged to unchanged valuations of 0.5x PBV. Overall, we are comfortable with our ascribed valuation given that it is close to -1S.D. from its historical average, and is also in-line with valuation of its fabrication-peer SAPNRG, which has slightly lower ROE despite higher net-gearing of 0.6x (versus MHB’s net-cash position).

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

Source: Kenanga Research - 29 Apr 2019