• Malaysia Marine & Heavy Engineering’s (MMHE) 2QFY17 reported losses for seventh consecutive quarter

• Normalised losses for 6MFY17 narrowed to –RM8.7m

• Heavy Engineering segment still recording operating losses

• Marine segment maintaining profitability

• Upgrade to Neutral with unchanged TP of RM0.70

Heavy Engineering segment a bane to group. MMHE’s 2QFY17 reported net loss of –RM13.7m, representing seventh consecutive quarter of losses. However, excluding impairment losses on receivables, net fair value loss on derivative and unrealised loss on forex, the company’s cumulative 6MFY17 normalised losses narrowed to –RM8.7m.

Heavy Engineering. On a quarterly sequential basis, segment revenue expanded by +2.9% to RM158m and while segment losses narrowed to –RM22.4m. The narrower losses were due to recognition of change orders and finalisation of completed projects in the current quarter. During the quarter, there were three sail-aways namely the Besar-A WHP Topside Jacket and HUC, F12 Kumang WHP Topside, Jacket and HUC and Baronia CPP Jacket, Bridge & Piles. The only significant Heavy Engineering project is the RM1b Petronas Bokor project secured in April 2017 with first steel cut only expected in 3QFY18.

Marine. The Marine segment performed better with revenue and operating income increasing by +24.6%yoy and over +200%yoy. These are premised on higher conversion works but negated by lower LNG vessel repairs. Operating profit margin also more than doubled year-over-year and management expects operating margin to improve further in 2HFY17.

Impact on earnings. As previously noted, we believe that FY17 will remain extremely challenging for MMHE as the Heavy Engineering jobs deplete severely with snail pace job replenishments. As the Bokor job will only start in the latter part of 2018, we believe that FY17 earnings will continue to falter in 2H17. We are therefore decreasing our FY17 earnings to RM19.7m while maintaining our FY18 earnings outlook.

Orderbook update. The company’s current orderbook stands at RM1.6b from RM2b previously. From the current job profile and work orders, approximately RM300m of the order backlog will be recognised in FY17. We further estimate that an additional RM200m worth of marine works will be undertaken in 2HFY17 – the company’s current dock capacity.

Upgrade to NEUTRAL. Since our previous SELL recommendation in April 2017, MMHE’ share price has fallen by nearly 30%, reaching our target price. We are therefore upgrading the stock to a NEUTRAL stance with downside bias in anticipation of better earnings performance in FY18 from higher marine works and from the start of the Bokor project. 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. 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 with Dry Dock 3 and also jobs from within RAPID.

Source: MIDF Research - 4 Aug 2017