3QFY20 rebounded from steep losses suffered in the previous quarter (albeit still failing to meet expectations), thanks to the resumption of operations post-MCO. While the deep losses are highly unlikely to recur, 4QFY20 may see a sequential dip given key project completions in 3QFY20. Nonetheless, we see the group staying on a recovery trajectory from the bottom, albeit a long and gradual road. The stock is currently trading at near record-low valuations, despite having a much more robust balance sheet with net- cash position as compared to sector peers. Upgrade to OP with TP of RM0.38.

9MFY20 deemed below expectations. MHB recorded cumulative 9MFY20 core net loss of RM88.2m (arrived after stripping off RM300m impairment loss), against our/consensus full-year loss forecasts of RM64.8m/RM80.2m. Nonetheless, we deem this to be below our expectation, dragged by poorer-than-expected marine segment. No dividends were announced, as expected.

Quarter staged a turnaround to the black. 3QFY20 reported a net profit of RM2.7m – a sizable turnaround from core net loss of RM97.0 recorded in 2QFY20, as the previous quarter saw some suspension of operations in compliance with the movement control order (MCO). YoY, the quarter managed a turnaround from losses of RM4.7m in 3QFY19, helped by the turnaround in its heavy engineering segment, which saw increased activities in ongoing projects. This was partially offset by the slower vessel repair and maintenance activities, impacting its marine segment. Cumulatively, 9MFY20 saw core net loss almost doubling YoY as the group’s yards suffered suspension of works in 2QFY20 in compliance with the MCO. Yards have resumed operations since April 2020.

Deep losses in 2Q unlikely to be repeated. Barring another mandatory suspension of operations, the rebound seen in 3QFY20 should signal that the deep losses are very unlikely to recur. That said, we expect the upcoming 4QFY20 to post a sequentially weaker set of results, as the 3QFY20 quarter saw the sail away and completion of several of the group’s projects (most notably Bokor Phase 3 central processing platform). Currently the group’s order-book stands at RM2.5b (providing 2-3 years’ revenue visibility), with its largest project – EPCIC Kasawari gas development, currently at 23% progress. Given that earnings recognition from projects tends to generally back loaded towards the later stages, earnings from Kasawari may only be felt in subsequent quarters down the road. Meanwhile, the group’s latest tender-book stands at RM12.3b.

Upgrade to OUTPERFORM (from MARKET PERFORM), albeit with a lowered TP of RM0.38 (from RM0.39 previously), pegged to unchanged valuation of 0.3x PBV at roughly -2SD from its mean. FY20-21E loss are further widened by 24%/359% to account for weaker marine segment assumptions.

The group is currently trading at near record-low valuations of 0.2x PBV, despite the recovery trajectory (albeit slow and gradual) from the bottom seen in 2QFY20. The group is also in a net-cash position, making its balance sheet much more robust as compared to most of its peers within the oil and gas sector. Impairment risk moving forward should also be lower as compared to peers as the group had already done its impairment exercises in the earlier quarter.

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 risks, (iv) mandatory suspension of operations.

Source: Kenanga Research - 28 Oct 2020