INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MMHE) 3QFY17 swung into profit making territory

• Normalised losses for 9MFY17 narrowed to –RM13.9m

• Heavy Engineering segment still recording operating losses

• Marine segment maintaining profitability

• Recommend profit taking on positive quarterly results announcement

• Downgrade to Trading Sell with unchanged TP of RM0.70

Profit making after 7 consecutive quarters of losses. MMHE’s 3QFY17 earnings swung into the black at RM16.4m after going through seven consecutive quarters of losses. The company’s cumulative 9MFY18 earnings however, is still in the red at –RM13.9m.

Heavy Engineering. 9MFY17 segment revenue declined by - 25.2%yoy to RM429.0m, while segment losses narrowed to –RM48.3m from -RM73.3m for the period of 9MFY16. The narrower losses were due to finalisation of completed projects in the current quarter. The Besar-A WHP Topside Jacket and HUC, F12 Kumang WHP Topside, Jacket and HUC and Baronia CPP Jacket, Bridge & Piles were sailed away in 1QFY17 while the modification and rejuvenation of Facilities Improvement Project (FIP) was completed in 3QFY17. In addition to that, for the onshore projects, the Rapid Package 22 (Plate rolling) project and the Rapid Package 3 (pipe support fabrication) were completed in 2QFY17. The only significant Heavy Engineering project is the RM1b Petronas Bokor project secured in April 2017 with first steel cut only expected in 3QFY18 – current progress is at 3% completion.

Marine. The Marine segment is holding up, still maintaining its operating profitability at RM40.7m despite revenue declining by - 11%yoy. The lower revenue is due to lower contract value and number of LNG vessels repaired while the operating profit is attributable to recognition of approved changed orders from on-going conversion projects.

Impact on earnings. We are maintaining our earnings estimates at this juncture, taking into consideration the progress levels of the projects at hand for both the heavy engineering and marine segments.

Cash position. Year-to-date 9MFY17 cash level has declined by -8.4% to RM614.9m from RM671.1m. The company’s operating cash flow also registered a loss of -RM10.9m.

Orderbook update. The company’s current orderbook as of Sept 2017 stands at RM1.4b (from RM1.6b previously). From the current job profile and work orders, approximately RM200m of the order backlog will be recognised in 4QFY17. We further estimate that an additional RM100m worth of marine works will be undertaken in 4QFY17 – the company’s current dock capacity.

Downgrade to Trading Sell. While we acknowledge that MMHE’s 3QFY17 swing into profit is an encouraging sign that the company is in an improving operating position, we are cognizant of its declining orderbook, lumpy earnings recognition and the various stages of completion for its key heavy engineering projects – its newly secured projects are still in its early stages. At current share price level, we are recommending investors to adopt a profit-taking position. Pursuant to the release of the 3QFY17 earnings, the company’s share price has rallied by more than >8% in a single day and hence, we are downgrading our call on MMHE to Trading Sell with an unchanged TP 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 with Dry Dock 3 and also jobs from within RAPID.

Source: MIDF Research - 1 Nov 2017