KEY INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering (MHB) remains in the red with a 3QFY19 loss of -RM4.7m

• Heavy Engineering segment reported operating loss from lower revenue recognition and completion of projects

• Marine segment profited from higher dry-docking activities from LNG carriers ahead of IMO 2020

• FY19F earnings revised down to RM11.1m, FY20F earnings maintained

• Maintain NEUTRAL with an unchanged TP of RM0.88/share

Quarterly loss narrowed by -79.5%yoy to -RM4.7m. Malaysia Marine and Heavy Engineering (MHB) reported a 3QFY19 net loss of – RM4.7m. This brings its cumulative loss to-date to –RM43.5m which is below our and consensus’ full-year FY19 earnings expectation. Comparing against 3QFY18, revenue dipped by -12.8%yoy meanwhile; its quarterly loss has narrowed by -79.5%yoy respectively mainly due to lower revenue recognized from both business segments year-over-year arising from the completion of major projects during the quarter. On a quarterly sequential basis, revenue declined by -8.0% whilst loss narrowed by +50.8% respectively.

Heavy Engineering. The Heavy Engineering segment’s revenue declined by -38.6%yoy to RM152.8m mainly due to lower revenue from post sail away of projects during the quarter. Meanwhile, the segment also recorded an operating loss of –RM6.8m or -81.4% which corresponds with the lower revenue recorded during the quarter.

Marine Repair & Conversion. The segment recorded lower revenue of RM101.5m or a decline of -37.5%yoy during the quarter. This was mainly attributable to lower cost plus revenue resulting from the completion of one of its main contract during the quarter. That said, the segment continued to post positive operating profit during the quarter of RM2.5m which is mainly due to higher revenue incurred from dry docking services on LNG carriers carried out during the quarter.

Earnings revision. We have revised our FY19F earnings downwards to RM11.1m (from RM36.6m previously) in view of the weak performance from its heavy engineering segment due to compressed margin. That said, we maintain our FY20F earnings at this juncture given that we anticipate the progress from the recently awarded Kasawari Gas Development as well as; the increasing number of LNG carriers expected to enter its dry docks to boost its earnings.

Orderbook update. The company’s current orderbook as of September 2019 stands at RM2,739.7m (from RM2,956m previously in June 2019). As for the Marine segment, an estimated RM400m worth of works are expected to be executed in FY19.

Maintain NEUTRAL with an unchanged TP of RM0.88. Post earnings revision; we are maintaining our NEUTRAL recommendation on MHB with an unchanged TP of RM0.88 per share. 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 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 - 25 Oct 2019