2QFY20 results plunged into steep losses, impacted by the Covid-19 pandemic on MCO lockdowns. Moving forward, despite its yard already resuming operations since April 2020, the group still does not expect activity levels returning to pre-pandemic levels in the foreseeable future. MHB will be badly hit by the global industry trend of capex cuts, resulting in project tender and award deferments. Maintain MP, with TP of RM039.

1HFY20 results below expectations. 1HFY20 recorded core loss of RM91m (after stripping off an impairment charge of RM300m), coming in below expectations against our/consensus full-year earnings forecasts of RM9.5m/RM18.5m, dragged by lower-than-expected activity levels due to the impact of Covid-19 pandemic-induced movement control order (MCO). No dividends were announced, as expected.

Huge losses dragged by MCO. 2QFY20 plunged into steep losses, dragged by the impacts of the Covid-19 pandemic. Aside from the asset impairments of RM300m, the group also incurred an additional RM90m expenses for the cost provisions and associated higher unabsorbed overheads. Operationally, both core segments of the group (i.e. heavy engineering, and marine) were badly hit during the quarter, as its yard had to shut down in compliance with the MCO, coupled with the restriction of docking of international clients.

Guiding for a very uncertain outlook. Despite its yards resuming operations since April 2020, coupled with the recent rebound in oil prices, the group do not see activity levels returning to pre-pandemic levels in the foreseeable future, expecting the revival to be slow and gradual. MHB will be badly hit by the trend of industry capex cuts, with its tender-book already shrinking to RM12.5b, from RM17b last quarter. Furthermore, the group may also be impacted by severe cash flow problems and financial distress faced by its clients as well as subcontractors and vendors, affecting project delivery timelines. Currently, we can safely expect push-back in delivery schedules for all of its major projects at hand. Additionally, despite the RM300m impairment recognised during the quarter, we do not discount the possibility of additional impairments moving forward, should the Covid- 19 pandemic continue to persist.

Maintain MARKET PERFORM, with a lowered TP of RM0.39. Post results, we slashed our FY20E/FY21E forecasts by >100% to losses of RM64.8m/RM8.4m (from profit of RM9.5m/RM11.7m), to account for lower activity levels as well as higher opex.

Subsequently, our TP is also lowered to RM0.39 (from RM0.45), pegged to 0.3x PBV – which is roughly -2SD from its mean valuations. Valuations are already at a premium against fabrication peer SAPNRG (trading at 0.1x PBV), given its healthier balance sheet and net-cash position.

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 - 24 Jul 2020