Despite narrower losses, 9MFY19 results fell below our expectations on poorer marine segment, while the heavy engineering segment continued to bleed. Moving forward, order-book stands at a multi-year high of RM2.7b after securing the Kasawari project, while tender-book has also ballooned to a high of RM13.7b, signifying greater contract award opportunities. Maintain OUTPERFORM and TP of RM1.05, with job wins acting as further catalysts.

Below our expectations. Despite the improved 9MFY19 results with losses of RM43.5m (narrowed 55% YoY), we deem the results as falling below our expectation (against previous FY19E earnings forecasts of RM14.5m) as we were expecting 3QFY19 to start breaking even. The shortfall was due to its marine segment that has turned around, but however was still short of our expectation, while its heavy engineering segment continued to be loss-making (albeit narrowing). Nonetheless, results are deemed to be broadly within consensus expectations (FY19E losses of RM9m), in anticipation of a stronger 4QFY19 underpinned by higher dry docking activities ahead of the implementation of IMO2020, coupled with further project execution in its heavy engineering segment. No dividends were announced, as expected.

Narrowing losses. MHB posted 3QFY19 losses of RM4.7m, narrowing 80% YoY, helped by a turnaround in its marine segment from lower conversion work costs, while offset by slightly wider heavy engineering losses due to the successful sail away of a project during the quarter (i.e. Tembikai NAG Offshore Wellhead Facilities). Sequentially, 3QFY19 losses narrowed 51% QoQ, thanks to smaller losses in its heavy engineering segment from greater project progression, masking slower marine segment activities.

Cumulatively, narrower 9MFY19 losses were mainly driven by a turnaround in its marine segment from higher conversion works and dry docking services on LNG carriers during the year. This was offset by wider heavy engineering losses given the sail away of a project during the quarter.

Order book at multi-year high. On the back of winning the engineering, procurement, construction, installation and commissioning (EPCIC) works for the Kasawari Gas Development project, MHB’s order-book currently stands at a multi-year high of RM2.7b, providing revenue visibility well over the next 3-4 years. Additionally, we note that its tender-book has also jumped to a high of RM13.7b (from RM3.2b in the previous quarter), signifying greater contract winning opportunities.

Maintain OUTPERFORM, on the back of its multi-year high order-book and strong tender-book, with new wins and earnings turnaround to possibly act as further catalysts. MHB is also one of the few names within the O&G sector with a net-cash balance sheet.

Our TP of RM1.05 remains unchanged, pegged to 0.7x FY20E PBV – roughly in-line with its 5-year mean valuations. Post-results, we reversed FY19E earnings to losses, after factoring in the weaker marine segment and slower profit recognition in heavy engineering, while FY20E CNP was also cut by 35% after factoring in less aggressive earnings assumptions for the marine segment.

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

Source: Kenanga Research - 25 Oct 2019