• Maintain BUY with new MYR0.60 TP from MYR0.57, 16% upside. Malaysia Marine & Heavy Engineering’s results were broadly in line with expectations, as we anticipate the group to record stronger quarters ahead. We remain optimistic on the company's outlook as it phases out older projects and undertakes new ones, which we believe have more favourable terms.

• Results broadly within ours, but below Street’s expectations. MMHE’s 1Q24 core net profit of MYR7.7m was 20% and 16% of ours and consensus’ estimates. We expect stronger quarters ahead from the recognition of its strong orderbook. No dividend was declared for the quarter.

• 1Q24 results review. MMHE’s revenue decreased 15% QoQ to MYR984.5m due to lower project billings from the heavy engineering (HE) division. The segment’s operating profit shrank 96% to MYR0.3m, corresponding to the lower revenue and further impacted by the absence of a cost recovery claim that was present in the previous quarter. The claim process is still ongoing, and MMHE expects to conclude it within the current financial year. Cushioning the decline in the HE segment was the stronger performance of the marine segment, which saw a seven-fold increase in operating profit to MYR13.8m from MYR2m. The group again moved into a net debt position of MYR131.9m due to the drawdown on revolving credit to finance its working capital on a short-term basis.

• Outlook. As of 1Q24, MMHE’s orderbook stood at MYR5.4bn, a 14.3% decline QoQ due to the recognition of several orders. Ongoing projects include the Jerun, Rosmari-Marjoram, and Kasawari carbon capture & storage (CCS), as well as the Joint Development Area (JDA) field development project. Meanwhile, the fabrication of the offshore substation (OSS) high voltage direct current (HVDC) platform for TenneT’s 2GW offshore wind farm programme is expected to start in FY25. The group has a tenderbook valued at MYR6-7bn, with a 50:50 split between international and domestic jobs. The bids are mainly for wind farm and fixed facilities jobs, with the expected award timeline as early as 2Q24. With the current orders on hand, the group is likely to secure smaller-sized projects. Following a soft quarter, dry dock utilisation has seen improvement due to higher demand for drydocking and repair services. The overall dry dock utilisation rate is guided to be more than 70%.

• Maintain BUY. Earnings forecast is maintained as results met expectations. However, we arrive at a new TP of MYR0.60 as we roll forward our 0.7x P/BV to FY25F, which is at +1.5SD from its 5-year mean given its robust orderbook – signalling a strong sector outlook. Our TP 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 - 27 May 2024