• Keep BUY, with new MYR0.80 TP from MYR0.85, 48% upside and c.2% yield. Malaysia Marine & Heavy Engineering’s results were broadly within expectations as we expect the upcoming quarters to make up for the softer 1Q23. We are still upbeat on the group’s outlook given its strong orderbook which is set to provide earnings visibility over FY23F–25F.

• Results broadly within our, but below Street expectations. Core net profit of MYR3.0m was 8% and 4% of our and consensus estimates. We expect stronger quarters ahead from the development of the new projects secured. No dividend was declared for the quarter.

• 1Q23 results review. Revenue of MYR496.2m (+17% QoQ, +18.8% YoY) was due to higher contribution from the heavy engineering (HE) division. However, this division saw an operating loss of MYR8.7m due to unabsorbed overhead costs which was masked by marine division’s MYR12.9m operating profit (-41% QoQ, +>100% YoY). The operating profit declined QoQ due to lower margin orders. Nonetheless, it more than tripled YoY, reflecting the stronger demand of dry-docking activities. MMHE is in a net cash position of MYR301.7m (MYR0.19/share) as of 1Q23.

• Progress of current projects and outlook. The group currently has five ongoing projects which includes the Kasawari topside (79.8% completed), the Jerun project (57.1% completed), the Rosmari-Marjoram project (29.8% completed), the Kasawari carbon capture storage (CCS) project (5.7% completed) and the newly awarded Joint Development Area (JDA) Field Development Project (Phase 6) which is at 0.9% completion. MMHE’s orderbook as of 1Q23 stands at MYR7.2bn (+14.8% QoQ) coming from its MYR1.4bn new order intake in the quarter. Its tenderbook is worth MYR9- 10bn with an 80:20 split between international and domestic jobs and c.50% of the bids are for offshore windfarms. We see a potential win of another project in 3Q23. On the marine division, we anticipate earnings to stay strong given its stable utilisation rate. Current utilisation for DD1, DD2, DD3 and land berth are at 67%, 94%, 74% and 63%.

• Maintain BUY with lower MYR0.80 TP. We make no changes to our FY23F-25F earnings for now, as we believe revenue will pick up more materially in the coming quarters from its three new project wins. We also maintain our 0.7x FY23F P/BV (+1.5SD from its 5-year mean) on the account of its strong orderbook and future foray into offshore windfarms, potentially providing more replenishment to its orderbook. However, our TP is lowered to MYR0.80 due to the ascribed 4% discount as its ESG score falls to 2.83 from 3.1, below the country median.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 19 May 2023