INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MMHE) 1QFY19 results registered a wider net loss yoy of –RM29.4m

• Revenue was down by -7.9%yoy on lower revenue recognition from Heavy Engineering segment

• Marine segment continues to suffer operating losses of – RM32.9m

• FY19F earnings estimate reduced to RM53.4m

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

Fifth consecutive operating loss. MMHE suffered its fifth consecutive net loss of –RM29.4m in 1QFY19 attributable mainly to the underperformance of its marine segment. Furthermore, 1QFY19 revenue was lower by -7.9%yoy attributable to lower revenue recognition from the heavy engineering segment during the quarter.

Heavy Engineering. Segment revenue was higher by +12.7%yoy at RM125.4.0m as a result of higher progress of ongoing projects during the quarter. Meanwhile, the Bokor Phase-3 redevelopment CPP has reached 49.9% completion, which is ahead of schedule. That said, the segment has also recorded operating losses due to higher unabsorbed overheads as expected contract awards have yet to materialise and lesser close-out of a significant project in the corresponding quarter.

Marine. Segment revenue was flat growing only by +0.9%yoy due to lower revenue from conversion works despite the higher number of LNG carriers secured for dry docking activities during the quarter when compared against last year – four of which were completed during the quarter. In addition, similar to its four previous quarters the segment recorded an operating loss of –RM7.5m in 1QFY19 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. For FY19, we reiterate 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. We have reduced our FY19F earnings estimate to RM53.4m (from RM60.0m previously) as we take into account persistent challenging operating environment which would result in compressed profit margins.

Orderbook update. The company’s current orderbook as of March 2019 stands at RM864m (from RM785m previously in December 2018). As for the Marine segment, an estimated RM400m worth of works are expected to be executed in FY19.

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. Despite oil prices making a recovery touching USD75pb recently, project sanctions and materialization of work orders continue to remain slower than expected especially in the offshore fabrication segment which affects orderbook replenishments. 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

Revised Target Price to RM0.73. Despite maintaining our NEUTRAL stance on the company, we have revised our target price to RM0.73 per share (from RM0.64 per share previously) as we roll forward our valuation base period to FY20. Our TP is premised on an unchanged PER20 of 17x pegged to EPS20 of 4.3sen. We opine that the revised target price is fair given that we are expecting MMHE’s business to stage gradual recovery from the 2HFY19 onwards with: (i) more LNG carriers expected to dock for dry docking actvities; (ii) higher revenue recognition from its Bokor CPP project and; (iii) more dry docking and fabrication activities once its Dry Dock 3 comes onboard in 2QFY20.

Source: MIDF Research - 29 Apr 2019