• Upgrade to BUY from Neutral, with new MYR0.55 TP from MYR0.42, 28% upside. Malaysia Marine & Heavy Engineering’s results met expectations with sustained earnings from its heavy engineering and marine segments. Following two consecutive profitable quarters, on the back of its increasing dry docking activities, we turn more optimistic on its outlook amidst potential new contract wins in the coming quarters.

• Within expectations. MMHE recorded core net profit of MYR4.8m in 3Q22, bringing 9M22 profit to MYR2.3m. 9M22 results were in line, as we expect MMHE to stay profitable in the next quarter. No dividend was declared for the quarter.

• Results review. MMHE’s second profitable quarter increased by 19% (QoQ) as the heavy engineering division saw an improvement in its EBIT- a 25% QoQ growth from MYR1.1m to MYR1.4m. This comes from the recovery of COVID-19 claims for an ongoing project. A MYR0.2m tax benefit aided 3Q22 earnings. Although we see a slight decrease in the marine segment’s QoQ EBIT (possibly due to lower value jobs), it should be highlighted that on a YoY basis, the segment has seen a turnaround from its MYR9.1m loss. YTD, dry dock utilisation has increased. MMHE is in a net cash position of MYR519m (MYR0.32/share) as of 3Q22.

• Outlook. MMHE’s orderbook increased by c.30% QoQ to MYR2.2bn with the award of the Rosmari Marjoram gas project valued at c.MYR500m. The group is currently in the engineering and procurement phase of this project. Other ongoing projects include Kasawari (73.1% completed), Jerun (54.5%) and the front end engineering design (FEED) for Kasawari’s carbon capture and storage (CCS) which is at 99.9% completion. MMHE’s tenderbook dwindled to c.MYR15-16bn from the previous quarter’s MYR18-19bn. However, management is hopeful to win more sizable domestic jobs in the coming quarters. On the marine side, we expect strong earnings to continue given the demand growth for dry-docking activities. Current utilisation for Dry Docks 1, 2 and 3 are at 72%, 81% and 84%.

• Upgrade to BUY. Following continuous dry docking activities’ strong demand, we increase our FY23F-24F earnings by 10.3-7.8%. We also revise our FY23F P/BV to 0.5x from 0.4x, which is +0.5SD from its 5-year mean, as we believe MMHE has managed to capture a higher market share subsequent to Malaysia’s border reopening and China’s lockdown, as ship owners opt for MMHE’s yard. We also believe clients will start giving out projects in the coming quarters, subsequent to the easing of material prices. After our adjustments, we arrive at a new TP of MYR0.55. Our TP is inclusive of a 2% ESG premium, grounded on MMHE’s 3.1 ESG score. Key risks include a slowdown in order replenishment, higher material costs, and labour shortages.

Source: RHB Research - 11 Nov 2022