INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MMHE) 2QFY18 results registered net loss of –RM49.8m

• Revenue declined –16.6%yoy on lower project recognition

• Both Heavy Engineering and Marine segments suffered operating losses

• Maintain NEUTRAL with revised TP of RM0.73 per share

Operating losses from lower project recognition. MMHE suffered 2QFY18 net loss of –RM49.8m due to lower revenue recognition in the quarter. 6MFY18 revenue slumped by -16.6%yoy premised on lower recognition from tail-end projects and commencement of new projects. In addition, revenue was also affected by deferments of dry docking activities from vessel owners.

Heavy Engineering. Segment revenue declined by -12.8%yoy to RM137.8m as lower revenue recognition was recorded from tail-end projects and commencement of new projects. 2QFY18 saw the completion of FSO Bechamas 2 external turret and Sepat –A WHP. The Bokor Phase-3 redevelopment CPP is still in its infancy at about 16% completion. The operating losses were exacerbated by additional cost provisions made.

Marine. Segment revenue also declined by -14.1%yoy as vessel owners have deferred their dry-docking to a later period in light of changes in local shipping regulations and the sailaway of two FSOs. In addition, additional costs were also incurred on conversion with revenue recognition pending verification and approval.

Moving forward. Despite crude oil prices and the overall operating climate improving, FY18 will continue to be a challenging year for MMHE, especially for the Heavy Engineering segment. This 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 consist of the RM1b Bokor CPP job which will only undergo the first steel cut in 3QFY18 – the large portion of works will happen only in FY19. In addition, its Marine segment is already operating at its ideal capacity.

Impact on earnings. Taking into consideration: (i) The unplanned cost escalation due to variation orders; (ii) Planned yard activities; (iii) Progress of current works at hand; (iv) estimated plant utilisation rates and; (v) expected marine repair and conversation works, we are reducing our FY18 and FY19 earnings estimates to RM9.3m and RM69m respectively.

We are expecting 2HFY18 to perform better than that of 1HFY18 as the bulk of the revenue and earnings to be backend-loaded in FY18 and into FY19.

Orderbook update. The company’s current orderbook as of June 2018 stands at RM1.14b (from RM1.22b previously in May 2018). As for the Marine segment, an estimated RM350-400m worth of works are expected to be executed in FY18 – comparable to RM365m worth of marine works executed in FY17. The company’s tenderbook is currently at around RM4.3b, of which 67% consists of international bids and 33% local bids. In addition, about 20% of the tenderbook have passed the technical clarification stage. Meanwhile, its prospective works now amounts to RM2.7b which consists of almost 100% from international bid.

Maintain NEUTRAL. We are maintaining our NEUTRAL stance on MMHE with a revised target price of RM0.73 per share. Our TP is premised on PER19 of 17x pegged to EPS19 of 4.3sen . 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 - 2 Aug 2018