INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MMHE) 3QFY18 results registered net loss of –RM22.9m

• Revenue declined –1.0%yoy on lower project recognition

• Both Heavy Engineering and Marine segments suffered operating losses

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

Operating losses from additional cost provisions. MMHE suffered its third consecutive net loss of –RM22.9m in 3QFY18 due to higher cost provisions for ongoing projects. 9MFY18 revenue was lower by -1.0%yoy premised on fewer ongoing projects in hand. In addition, revenue was also affected by deferments of dry docking activities from vessel owners.

Heavy Engineering. Segment revenue was higher by +51.6%yoy at RM178.1m as higher revenue was recognised from ongoing projects in hand. The Bokor Phase-3 redevelopment CPP is still in its infancy at about 25.1% completion. Despite the higher revenue, the segment recorded operating losses of -RM4.1m due to additional cost provisions made during the quarter.

Marine. Segment revenue also increased by +14.0%yoy due to higher revenue from conversion works as well as; dry docking activities during the quarter. However, the segment recorded an operating loss of -RM16.0m due to additional costs incurred on conversion works with revenue recognition pending verification and approval. This is further exacerbated by compressed margins for dry docking activities during the quarter.

Moving forward. FY18 and going into FY19 will continue to be a challenging period for MMHE, especially for the Heavy Engineering segment. This is despite crude oil prices hovering at the USD70-80pb level. 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 only underwent the first steel cut in 3QFY18 – the large portion of works will happen only in FY19. 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.

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; (v) expected marine repair and conversation works and; (vi) compressed margins for its dry docking activities, we are reducing our FY18 and FY19 earnings estimates to -RM23.3m and RM60.1m respectively.

Orderbook update. The company’s current orderbook as of September 2018 stands at RM932m (from RM1.14b previously in June 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 RM6.0b.

Maintain NEUTRAL. We are maintaining our NEUTRAL stance on MMHE with a revised target price of RM0.64 per share. Our TP is premised on PER19 of 17x pegged to EPS19 of 3.76sen. 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 - 26 Oct 2018