Despite 4QFY19 turning around to a profit, cumulative FY19 net losses still overshot expectations. Overall, narrowed losses were helped by stronger marine segment from higher dry docking activities. Going forward, outlook remains positive, with dry docking activities expected to sustain, while order and tender books for its heavy engineering remains at multi-year highs. Maintain OP with lowered TP of RM0.89.

Full year losses missed expectations. Despite posting a turnaround quarter in 4QFY19, cumulative FY19 net loss of RM34.2m still missed expectations, against our forecasts of RM27.5m loss, and consensus of RM29.2m, due to widened losses from heavy engineering as a result of completion of several projects. No dividends were announced, as expected.

Posted a profitable quarter. 4QFY19 managed to stage a turnaround, posting a net profit of RM9.3m (against net loss of RM25.2m in 4QFY18 and net loss of RM4.7m in 3QFY19). This was largely helped by its marine segment, which benefited from greater conversion works and dry docking activities, mitigating the widened losses in heavy engineering. For the cumulative FY19, the company narrowed its losses by 72% YoY, similarly due to a turnaround in its marine segment, masking wider losses in heavy engineering.

Outlook is still improving. Going into FY20, dry docking activities are expected to see gradual improvement. The demand for global LNG demand is on the rise, with increased exports into to the Asia Pacific market. The implementation of IMO2020 would mean lower deferment of dry docking activities from ship operators, while we were also guided that ships could be encouraged to avoid China shipyards amidst the ongoing Covid-19 threat, thus benefiting MHB in 1QFY20. The company is also set to commence operations of its Dry Dock 3 in 3QFY20, which will increase its capacity by 40%, and improve the company’s service offerings, and being able to better cater for large sized vessels.

Meanwhile for its heavy engineering, its current order-book of RM3b is at a multi-year high after winning the Kasawari EPCIC last year, giving them jobs visibility for the next 3-4 years. This is on top of its strong tender-book of RM12.9b, which more than doubled from end-FY18 of RM5.5b, reflecting the surge in fabrication jobs flow in the global market.

Post-results, we cut our FY20 earnings forecasts by 58% after increasing our costs assumption for its heavy engineering, while simultaneously introducing our FY21E numbers.

Maintain OUTPERFORM, with lowered TP of RM0.89 (from RM1.05 previously), pegged to 0.6x PBV on FY20E – in line with its 5-year mean. Our valuations were lowered down a notch from 0.7x PBV previously, given the earnings cut on the back of wider-than-expected FY19A losses. Nonetheless, we are still calling an OUTPERFORM on the stock given its improving outlook. MHB is also one of the few names within the oil and gas sector with a healthy 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, and (iii) project execution and earnings delivery.

Source: Kenanga Research - 13 Feb 2020