• Maintain BUY with new MYR0.57 TP from MYR0.60, 19% upside. Malaysia Marine & Heavy Engineering’s results came in below expectations as the group is still incurring additional cost provisions for an ongoing project. However, MMHE turned into the black following the recognition of cost recovery claims. Going forward, we believe its strong pipeline coupled with ongoing efforts of its recovery claims, will ensure profitability.

• MMHE results were below ours and street’s expectations. It recorded core net loss of MYR490.1m against ours and consensus’ full-year forecasts of MYR147.9m and MYR132.3m losses. No dividend was declared for the quarter as expected.

• Results review. FY23’s core net loss of MYR490.1m is driven by unceasing cost provisions even though revenue doubled YoY to MYR3.3bn (from MYR1.7bn). The revenue increase can be attributed to higher project billings from the heavy engineering (HE) division. For 4Q23, the group turned profitable with a core net profit of MYR9.4m as the HE segment recorded an EBIT of MYR7.4m. It also incurred cost provisions this quarter – offset by the reversal of provisions from completed projects. However, the marine segment’s operating profit declined 54% QoQ to MYR2m (from MYR4.4m) due to lower margin jobs amid increasing competition from China. As of 4Q23, MMHE is back to its net cash position of MYR190m (MYR0.12/share).

• Outlook. As of 4Q23, MMHE’s orderbook stands at MYR6.3bn (+10% QoQ), as the group secured an offshore windfarm project which provides visibility up to FY27. However, project execution of its orderbook needs to be monitored given its recurring cost provisions. Its tenderbook stands at MYR6-7bn, with a 50:50 split between domestic and international jobs. Moving forward, MMHE is looking to balance its portfolio between oil and gas and renewable energy opportunities. For the marine business, we expect to see softer quarters ahead from stiff competition amid the reopening of China’s yard. Current utilisation for dry docks are guided at 50-80%.

• Maintain BUY. We lower our FY24-25 forecast by 5.2-10.4% on account of ongoing cost provisions, as well as introducing FY26 earnings. We arrive at a new MYR0.57 TP as the group’s book value per share falls to MYR0.83 from MYR1.04 given its accumulated losses. Nonetheless, given the turnaround quarter and robust orderbook – a testament to the strong sector outlook especially as MMHE is now in the renewable energy space, opening more job opportunities – the TP is now pegged to 0.7x P/BV to FY24F (+1.5SD from its 5-year mean) and includes a 4% discount for its 2.8 ESG score, below the country median. Key risks include slowdown on replenishments, higher-than-expected material costs, and labour shortages.

Source: RHB Research - 15 Feb 2024