INVESTMENT HIGHLIGHTS

• Malaysia Marine and Heavy Engineering’s (MMHE) reported 1QFY17 earnings in the red for sixth consecutive quarter

• Operating loss at -RM15.6m

• Heavy Engineering segment still in the loss

• Heavy Engineering orderbook including Bokor job at RM2b

• Maintain SELL with unchanged TP of RM0.70 per share

Heavy Engineering segment a bane to group. MMHE’s 1QFY17 reported net loss of –RM16.6m, representing sixth consecutive quarter of losses. Excluding unrealised forex losses and change in fair value of hedging derivative, the company would have just managed to break even at the net level. The losses were largely attributable to the Heavy Engineering segment.

Heavy Engineering. On a quarterly sequential basis, segment revenue declined by -11.2%qoq while registering an operating loss inline with the completion of the F12 Kumang and Baronia projects. Operating losses narrowed slightly to –RM24.1m (-RM35.1 in 4QFY16) as better profit margins were recorded for the jobs at hand.

Marine. Segment revenue and operating profit declined by -37%qoq and -81%qoq respectively due to relatively low LNG repair works. Segment profit margin also declined by -26ppts to 11.4%.

Impact on earnings. We believe that FY17 will remain challenging for MMHE, especially for the Heavy Engineering segment before the execution of the Bokor project in FY18. Therefore, we are revising our FY17 earnings downwards to RM39.4m while maintaining our FY18 earnings forecasts.

Orderbook update. The company’s orderbook inclusive of the RM1b Bokor project is at RM2b from RM1b previously. From the current job profile and work orders, approximately RM300-500m of the order backlog will be recognised in FY17. We further estimate that an additional RM400-500m worth of marine works will be undertaken in FY17 – the company’s current dock capacity.

Maintain SELL. Despite an unsatisfactory first quarter, we are comforted by the fact that MMHE was still able to secure the sizable Bokor project in such operating climate. In addition, we commend the company’s effort in trying to diversify its income stream, without straying too far from its core competencies. However, from a stock trading standpoint, we do not foresee any significant near-term re-rating catalyst which would cap stock price appreciation in the immediate term. As such, we are reiterating our SELL recommendation with an unchanged target price of RM0.70 per share. Our target price is based on our house mid-cap oil and gas service provider target PER of 14x pegged to EPS18 of 5sen. 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 - 28 Apr 2017