Narrowed 1H19 losses are deemed broadly within expectations, in anticipation of a stronger 2H from increased dry-docking activities and greater job progressions from heavy engineering. After recently winning Kasawari EPCIC, its order-book hit a multi-year high of RM3b, while prospects of further job wins are still likely, and may potentially act as re-rating catalysts if materialised. Maintain OUTPERFORM with TP of RM1.05.

Broadly within expectations. MHB posted 1H19 losses of RM38.8m (narrowed 81% YoY, 29% QoQ), against our full-year profit forecast of RM14.5m and consensus loss forecast of RM1.5m. Nonetheless, we deem the results to be broadly in line with expectations in anticipation of a stronger 2H19, driven by increased dry-docking activities coupled with expected improvements in its heavy engineering division. No dividends were announced, as expected.

Narrowing losses. MHB managed to narrow 2Q19 losses to RM9.5m, from RM49.5m in 2Q18 and RM29.4m 1Q19. The narrower losses were mainly helped by (i) turnaround in its marine segment, on the back of improvement in dry docking activities, coupled with (ii) lowered losses for its heavy engineering segment, in tandem with the higher revenue, on the back of greater project progression. Cumulatively, thinner YoY losses recorded for 1H19 were also due to turnaround in the marine segment, similarly from higher dry-docking activities, masking increased costs for its heavy engineering.

Order book at multi-year high. On the back of recently winning the engineering, procurement, construction, installation and commissioning (EPCIC) works for the Kasawari Gas Development project, MHB’s order book jumped to a multi-year high of ~RM3b (from RM864m in the previous quarter), providing revenue visibility for well over the next 3-4 years. Further potential job wins could still come from: (i) tender book of RM3.2b, with bids for jobs both locally and overseas, (ii) long-term agreement (LTA) with Saudi Aramco, in partnership with TechnipFMC, and (iii) conversion works for the Limbayong FPSO, with expected award in early 2020. Meanwhile, for this year, we are expecting a stronger 2H, underpinned by (i) further increment in dry docking activities, given the imminent implementation of IMO2020, coupled with (ii) possible profit recognition from Bokor CPP (currently at 58.6% progression, expected completion in 3Q20) to drive the heavy engineering segment.

Maintain OUTPERFORM, with an unchanged TP of RM1.05 pegged to 0.7x FY20E PBV – roughly in-line with its 5-year mean valuations. Our call is premised on its solid jobs visibility from its strong multi-year high order-book of RM3b, while its losing streak is likely to have already bottomed-out with it potentially reversing into profitability, as seen in the recent quarterly results. Meanwhile, additional contract wins could act as further re-rating catalysts and MHB is also one of the few names within the O&G sector with a net-cash balance sheet.

Risks to our call include: (i) poorer-than-expected dry docking activities, (ii) higher-than-expected costs overrun in heavy engineering, (iii) project execution and earnings delivery.

Source: Kenanga Research - 5 Aug 2019