INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MMHE) 4QFY18 results registered net loss of –RM25.2m

• Revenue increased +10.2%yoy on higher revenue recognition from Heavy Engineering segment

• Marine segment suffered operating losses of –RM32.9m

• Maintain NEUTRAL with unchanged TP of RM0.64 per share

Fourth consecutive operating loss. MMHE suffered its fourth consecutive net loss of –RM25.2m in 4QFY18 attributable mainly to the underperformance of its marine segment. That said, 4QFY18 revenue was higher by +10.2%yoy premised on higher revenue from the heavy engineering segment during the quarter.

Heavy Engineering. Segment revenue was higher by +10.2%yoy at RM224.0m as a result of higher revenue from ongoing projects as well as; commencement of new order intake during the quarter i.e: Pluto Water Handling Module and Tembikai NAG OWF. Meanwhile, the Bokor Phase-3 redevelopment CPP has reached 36.7% completion, 7.0% ahead of schedule. In addition, the segment has also returned to black with a modest operating profit RM1.6m (-86.0% lower yearover-year) due to close-out of a significant project in the corresponding quarter.

Marine. Segment revenue slumped by -42.6%yoy due to lower revenue from conversion works as well as; decline in dry docking activities during the quarter. In addition, similar to its three previous quarters the segment recorded an operating loss of –RM32.9m in 4QFY18 attributable to insufficient dry docking works to absorb fixed overheads as well as; compressed margins for dry docking activities during the quarter due to repair and conversion works done on smaller vessels. This is despite both Dry Dock 1 (DD1) and Dry Dock 2 (DD2) recording an average utilisation rates of 70% and 75% during the quarter.

Moving forward. Going into FY19, we opine that it will continue to be a challenging period for MMHE, which is predominantly due to the timing differences in revenue and profit recognition between tail-end projects and new projects. The large portion of its orderbook consists of the RM1b Bokor CPP job where the major portion of the works will happen only in FY19. The revenue and earnings for the Bokor CPP project are slated to only be recognised at the later stage of the project.

However, its Marine segment could potentially benefit from increased in marine repair activities in the coming year due to the impending compliance to the International Maritime Organisation (IMO) fuel sulphur cap ruling by January 2020 – which we opine could potentially drive dry docking activities at both its dry docks.

Impact on earnings. No changes made to our FY19F earnings estimate.

Orderbook update. The company’s current orderbook as of December 2018 stands at RM826m (from RM932m previously in September 2018). As for the Marine segment, an estimated RM400m worth of works are expected to be executed in FY19. Meanwhile, the company’s tenderbook is currently at about RM5.5b. Out of the RM5.5b, 25% consists of international tenders with at least RM500m worth of tender are for workorders under Saudi Aramco’s long term agreement (LTA).

Maintain NEUTRAL. While we understand that market activities have picked up since 2HFY18, job awards have only been actively given out in the Middle East region and in India while regions such as North Asia and South East Asia have seen a rather muted job awards.

In addition, under its LTA with Saudi Aramco and frame agreement with Petronas; we understand from the Management that bids for projects under these two agreements have begun and the company is expecting some jobs to be awarded during the year. However, we are wary on the fact that not much visibility is available at this point in time on the potential jobs to be won and the orderbook replenishment going forward as to reduce its dependency on the Bokor CPP project.

That said, the focus for the company moving forward now is on the expansion of the Marine segment with Dry Dock 3 which is expected to be completed on schedule in 2QFY20 – where it will mainly target repairs and conversions of LNG carriers. The company is also expanding into construction and fabrication of modular structure and renewable energy which is expected to broaden its revenue base going forward. Therefore, due to the expected persistent challenging operating environment during the year, we are maintaining our NEUTRAL stance on MMHE at this juncture with a unchanged target price of RM0.64 per share. Our TP is premised on PER19 of 17x pegged to EPS19 of 3.76sen.

Source: MIDF Research - 14 Feb 2018