• Malaysia Marine and Heavy Engineering's (MMHE) full year FY16 earnings in the red

• Massive impairment charges of RM140.5m in 4Q16

• Negative operating cash flow for the year

• Depleting jobs to sustain revenue

• Maintain SELL with lower TP of RM0.56 per share

Kitchen sinking. MMHE's 4Q16 reported earnings remain in the red at –RM119.7m. Revenue for the quarter also slumped by -57.9%yoy largely due to depleting ongoing jobs in heavy engineering offshore works. The company also recorded impairment charges of -RM140.5m for the year. After adjusting for forex gains and gains on disposal in FY16, MMHE’s full year normalised losses amounted to –RM151m.

Cash under pressure. The company’s net operating cash for FY16 stands at a loss of –RM106.5m with a cash pile of RM671.1m, down from RM860.2m a year earlier.

Heavy Engineering. FY16 segment revenue more than halved to RM746.7m while suffering an operating loss of –RM107.7m. The dismal numbers are due to tail-end projects, low activity levels and overall lower value of jobs undertaken.

Marine. Despite full year segment revenue falling by -4.7%yoy, the segment still remains profitable at RM88.5m. Profit margin also expanded by +2.4ppts to 19.9% from a year earlier. The better margins were a result of LNG and FPSO conversion works which generally provides higher margins.

Weak orderbook recognition of FY17. Current heavy engineering orderbook stands at RM1,058.6m. From the current job profile and work orders, approximately only 30-50% of the order backlog will be recognised in FY17. The company further estimates that the revenue from the marine segment will match that of FY16 at approximately RM400-500m per year – the company’s current dock capacity.

Impact on earnings. We remain despondent on the massive losses incurred by the company at both the operating level and the net level. In addition, the orderbook profile indicates that FY17 revenue will most likely be on par, or possibly even fall short compared with that of the previous year. As such, we are reducing our FY17 normalised earnings outlook by -26.7% to RM64.1m.

Maintain Sell. We do not foresee any near-term re-rating catalyst which would allow the company to achieve revenues in excess of >RM1.2b in the immediate term. As such, we are maintaining our SELL recommendation with a lower target price of RM0.56 per share (previously RM0.77). Our target price is based on our house mid-cap oil and gas service provider target PER of 14x pegged to EPS17 of 4sen. The focus for the company moving forward now is on the expansion of the Marine segment and also jobs from within RAPID.

Source: MIDF Research - 8 Feb 2017