KEY INVESTMENT HIGHLIGHTS

• Malaysia Marine & Heavy Engineering (MHB) returned to black with a net profit of RM2.4m in 3QFY20
• Earnings was supported by higher revenue recognition from heavy engineering’s on-going projects and absence of oneoff costs during the quarter
• Marine segment returned to black during the quarter despite lower revenue and higher unabsorbed overhead cost
• FY20-21F earnings maintained
• Upgrade to TRADING BUY with an unchanged TP of RM0.37 per share

Returned to black, once again. Malaysia Marine and Heavy Engineering (MHB) returned to black with a net profit of RM2.4m in 3QFY20. This brings its 9MFY20 cumulative normalised loss to -RM89.1m which was within our but above consensus’ expectations. Comparing against 3QFY19, revenue climbed by +45.3%yoy meanwhile; earnings surged by >100%yoy during the quarter respectively. Similarly, on a quarterly sequential basis; revenue and earnings surged by >100.0%yoy. The improved performance during the quarter can be primarily attributed to higher revenue recognition from its heavy engineering segment as well as; the absence of the one-off costs such as: (i) costs associated with the management of Covid-19 worth RM90.0m and; (ii) impairment of RM300.0m which were fully incurred in 2QFY20.

Heavy Engineering. The Heavy Engineering segment revenue climbed by +77.3%yoy to RM270.9m during the quarter due to the higher revenue recognition from its the ongoing projects. The projects that contributed to higher revenue during the quarter were the Kasawari, Bekok, Bergading and Bokor. Consequently, the segment also recorded an operating profit of RM0.2m or an increase of >100%yoy following the progress on current ongoing projects and completion of several notable projects during the quarter such as: Bokor Phase 3 Re-Development CPP and Bergading MRU Module which have sailed away during the quarter.

Marine Repair & Conversion. Meanwhile, the marine segment recorded lower revenue of RM98.6m or a marginal contraction of - 2.9%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 slowdown in the world’s economy due to the Covid-19 pandemic. Consequently, it recorded lower operating profit vs 3QFY19 at RM1.2m or a contraction of -51.7%yoy due to higher unabsorbed overhead. That said, the segment returned to black during the quarter vs an operating loss of -RM30.0m in the preceding quarter.

Orderbook update. The company’s current orderbook as of end-September 2020 stands at RM2,497.2m (from RM2,598.4m previously in June 2020). Currently, >70% of the orderbook is attributable to the Kasawari Gas Development. Meanwhile, its tenderbook currently stands at RM12.26b with 79% of the tenders are for international projects with the remaining 21% are for local projects respectively.

Earnings revision. We are maintaining our FY20-21F earnings expectations at this juncture as we opine that MHB will be able to meet our earnings projections. That said, we have factored in our current projections; a slower recovery in earnings following the recent development of Covid-19 globally which is currently seeing newly infected cases elevating in some countries.

Target Price unchanged at RM0.37. We are making no changes to our TP of RM0.37 at this juncture. Our TP is premised on PER21 of 17x pegged to EPS21 of 2.2sen.

Upgrade to TRADING BUY. We are upgrading our recommendation on MHB to TRADING BUY (from NEUTRAL previously). We opine that the upgrade is timely given that we believe that the worst is over for the company and MHB’s earnings could potentially surprise on the upside in the near future despite the current challenging operating environment. This is as we are expecting MHB will stage gradual and steady recovery from 2HFY20 onwards to be driven by: (i) better revenue recognition from ongoing projects as progress of project increases (ii) and; completion of Dry Dock 3 which is expected to start contributing in terms of revenue in 1QFY21. While the current operating environment plagued by the COVID-19 pandemic has yet to show signs of abating – which could dampen its chances of securing new projects; we opine that MHB’s performance going forward will be more reliant on its effort in improving internal operational condition (i.e: cost optimisation etc) and maintaining uninterupted progress of its ongoing projects.

Source: MIDF Research - 28 Oct 2020