KEY INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering (MHB) slips back into the red with a normalised loss of -RM97.0m in 2QFY20

• Earnings were impacted by the closure of yards following the implementation of MCO during the quarter resulting in lower revenue recognition for both segments

• Marine segment remains in loss-making position arising from high unabsorbed overhead costs

• FY20-21F earnings trimmed to -RM82.6m and RM34.7m

• Maintain NEUTRAL with a revised TP of RM0.37/share

Full impact from Covid19 felt in 2QFY20. Malaysia Marine and Heavy Engineering (MHB) slips back into the red with a reported loss of -RM400.3m in 2QFY20. However, after stripping out the impairment loss on its property, plant and equipment as well as right-of-use assets amounting to RM300.0m, its normalized loss came to -RM97.0m during the quarter. This was below our and consensus’ full-year earnings expectation for FY20. Comparing against 2QFY19, revenue fell by - 43.8%yoy. Meanwhile, earnings dipped by >100% mainly attributable primarily to: (i) lower revenue from both segments; (ii) additional cost provisions and; (iii) associated higher unabsorbed overhead costs from the spread of novel coronavirus (Covid19). All of which were estimated to be at about RM90.0m recognised during the quarter. Similarly, on a quarterly sequential basis, revenue declined by -55.2% and earnings dipped by >100%qoq due to higher unabsorbed cost coming from its Marine segment.

Heavy Engineering. The Heavy Engineering segment revenue slid by - 26.2%yoy to RM112.1m mainly due to the lower recognition on the ongoing projects during the quarter. Additionally, the segment also recorded an operating loss of -RM69.8m or >-100% primarily due to the additional cost provisions and higher unabsorbed overheads arising from Covid19 pandemic as yards were forced to shut down for four weeks due to the implementation of the Movement Control Order (MCO) in March and April.

Marine Repair & Conversion. Similarly, the marine segment recorded lower revenue of RM43.3m or a contraction of -65.3%yoy during the quarter. This was mainly attributable to lower number of vessels secured for dry-docking services on LPG vessels and conversion works done on vessels during the quarter following the shut-down of its yard due to the implementation of MCO. This was exacerbated by the lockdown measures implemented worldwide which has restricted the movement of vessels in international water to prevent further spread of Covid19. As a result, the segment result remains a loss of -RM30.0m during the quarter mainly attributable to lower revenue from the conversion work during the quarter coupled with unabsorbed overhead costs

Source: MIDF Research - 24 Jul 2020