INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering’s (MHB) 2QFY19 results registered a narrower net loss yoy of –RM9.5m

• Revenue grew by +23.9%yoy on higher revenue recognition from both Heavy Engineering and Marine segments

• Marine segment returned to the black with RM8.6m operating profit

• FY19F earnings estimate reduced to RM36.6m, FY20F earnings lifted to RM82.6m

• Maintain NEUTRAL with revised TP of RM0.88 per share

Operating loss narrowed to -RM9.5m in 2QFY19. MHB suffered its sixth consecutive net loss of –RM9.5m in 2QFY19 attributable mainly to the underperformance of its heavy engineering segment. That said, the loss has significantly narrowed both on year-over-year and quarterly sequential basis by +80.9% and +67.7% respectively owing to the ramp up in activities of its marine repairs and conversions. In addition, overall revenue grew by +23.9%yoy and +36.1%qoq respectively mainly due to higher work orders recognised during the quarter.

Heavy Engineering. Segment revenue was higher by +10.3%yoy at RM151.9m as a result of higher progress of ongoing projects during the quarter. Meanwhile, the Bokor Phase-3 redevelopment CPP has reached 58.6% completion, which is scheduled to be completed in mid-3QFY20. That said, the segment has also recorded operating losses due to higher unabsorbed overheads and lesser close-out of a significant project in the corresponding quarter.

Marine. Segment revenue surged by +46.0%yoy due to increased revenue from conversion works with higher number of LNG carriers secured for dry docking activities due to the IMO requirement. Following that, the segment has also staged a turnaround with an operating profit of RM8.6m. During the quarter, both Dry Dock 1 (DD1) and Dry Dock 2 (DD2) recorded an average utilisation rates of 90% and 83% respectively.

Moving forward. We opine that MHB’s earnings in the 2HFY19 will continue to be driven by its Marine segment which will benefit from increased marine repair activities due to the impending compliance to the International Maritime Organisation (IMO) fuel sulphur cap – which we opine will continue to drive dry docking activities at both its dry docks. Due to this, we expect utilisation rates at both dry docks to average at about 90% in the 2HFY19.

Impact on earnings. We have reduced our FY19F earnings estimate to RM36.6m (from RM53.4m previously) as we take into account the ramp up in overhead costs for the Kasawari Gas Development project which will come ahead of the revenue recognition. That said, we have raised our FY20F earnings estimate to RM82.6m (from RM62.8m previously) as we incorporate 25% (or about RM500m) of the expected revenue recognition coming from the Kasawari Gas Development project in FY20 with the remaining to be recognised in the following year.

Orderbook update. The company’s current orderbook as of July 2019 stands at RM2,956m (from RM864m previously in May 2019), mainly contributed by the Kasawari Gas Development project awarded last month. As for the Marine segment, an estimated RM200m worth of works are expected to be executed in FY19. In terms of its bidbook, Management disclosed that with the award of Kasawari Gas Development project, its bidbook has now been reduced to about RM4.0b which consists of RM3.2b from the Heavy Engineering segment. Meanwhile, 60% of the bidbook is for international works with the balance of 40% for local works.

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 award. 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 are ongoing and the company is expecting some jobs to be awarded by end of the year to early next 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.

That said, the focus for the company moving forward will be on the execution of the Kasawari Gas Development project as well as; 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 3rd party 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. Due to this, we are maintaining our NEUTRAL stance on MHB at this juncture

Revised Target Price to RM0.88. Despite maintaining our NEUTRAL stance on the company, we have revised our target price to RM0.88 per share (from RM0.73 per share previously) as we incorporate the contribution from the Kasawari Gas Development project awarded recently. Our TP is premised on an unchanged PER20 of 17x pegged to EPS20 of 5.2sen. We opine that the revised target price is fair given that all positives have been priced in at this juncture whilst visibility on future orderbook replenishments or possible contract awards remains scarce. We are also expecting MHB’s business to stage gradual recovery from the 2HFY19 onwards following: (i) more LNG carriers are expected to dock for dry docking actvities; (ii) higher revenue recognition from its Bokor CPP project; (iii) more dry docking and fabrication activities to take place once its Dry Dock 3 comes onboard in 2QFY20 and; (iv) gradual revenue recognition from its Kasawari Gas Development project.

Source: MIDF Research - 5 Aug 2019