• Maintain BUY and MYR0.60 TP, 22% upside. Malaysia Marine & Heavy Engineering’s results came in below expectations as cost provisions recurred due to delays of project execution. Even so, we maintain our optimistic outlook as we anticipate there will be no further instances of cost provisions going forward. We believe the group’s robust orderbook of MYR5.7bn (3.5x cover ratio) will support its earnings growth for FY24-25F.

• Results below ours and Street’s expectations. MMHE recorded core net loss of MYR499.4m against ours and consensus’ full-year forecasts of MYR118.7m loss and MYR34.7m profit. We do not expect any dividend payout for the year given the net loss estimate.

• 3Q23 results review. MMHE’s revenue decreased 40% QoQ to MYR638.5m due to lower project billings from the heavy engineering (HE) division. The segment saw narrowed operating loss of MYR107.7m from MYR390m in 2Q23. The lumpy cost provisions from 2Q23 continued into this quarter, resulting from revised schedules for ongoing projects. Slightly offsetting HE’s loss, the marine segment’s operating profit saw a 33% QoQ improvement to MYR4.4m from MYR3.3m. MMHE moved into a net debt position of MYR52.6m following the drawdown on revolving credit to finance its working capital on a short-term basis.

• Cost provisions. In 3Q23, we again see an operating loss of MYR100.2m as the group incurred more cost provisions due to the delayed load out of certain ongoing projects. This comes as a surprise as management had guided it would be a one-time occurrence. The negotiation for the recovery of the cost provisions is ongoing and MMHE hopes to finalise the claims within FY23. We believe the recovery of cost provisions as well as coming quarters’ profit from the marine segment will narrow 9M23’s losses.

• Outlook. As of 3Q23, MMHE’s orderbook stands at MYR5.7bn (-8% QoQ), as the group recognised some orders for the quarter. Its tenderbook dwindled to MYR2-3bn from 2Q23’s MYR5-6bn. However, we are not overly concerned of the drop given its current projects on hand – able to provide earnings visibility up to FY25. For the marine business, we expect to see softer quarters given that demand for dry-docking activities is likely to be slower in the upcoming winter. Current utilisation for dry dock (DD) 1, DD2, and DD3 are 35%, 39%, and 31%.

• Maintain BUY and MYR0.60 TP. We widened our FY23 net loss forecast by 14.8% to MYR136.3m (from MYR118.7m), in accordance with the higher-than-expected HE cost provisions, while maintaining FY24-25F as we have assumed lower margins for both HE and marine divisions previously. Our TP is maintained at MYR0.60 as we roll forward our 0.6x P/BV to FY24F, which is at +1SD from its 5-year mean. We are still upbeat on the stock given its robust orderbook – signalling a strong sector outlook – which is set to provide cover for FY24-25. Our TP includes a 4% discount for its 2.8 ESG score, below the country median. 

Source: RHB Securities Research - 9 Nov 2023