• Keep BUY, new MYR0.61 TP from MYR0.60, 31% upside. Malaysia Marine & Heavy Engineering’s results beat expectations thanks to the booking of cost recovery claims. We remain optimistic on MMHE's outlook as it transitions from older projects to new ones with more favourable terms while also demonstrating resilience in the marine segment.

• Exceed expectations. The group’s 1H24 core earnings of MYR56m accounted for 146% and 115% of our and consensus estimates, largely due to cost recovery claims recognised during this quarter. 2Q24 revenue decreased 9% QoQ (-15% YoY) to MYR900m on lower billings from both the heavy engineering or HE and marine segments. However, core net profit increased significantly to MYR48.3m, driven by the cost recovery claim with the process still ongoing. MMHE remains in a net debt position (MYR92.7m), owing to the drawdown on revolving credit to finance its short-term working capital needs. No dividend was declared for the quarter.

• Booked and busy. As of 1Q24, MMHE’s orderbook rose by 14.8% QoQ to MYR6.2bn from the previous quarter’s MYR5.4bn – driven by securing another offshore substation (OSS) project. Current project updates: Jerun is 99% complete, Rosmari-Marjoram is 95% complete (target completion: 3Q24), the Joint Development Area or JDA field development project is 48% complete (target completion: 2Q25), and the Kasawari Carbon Capture & Storage or CCS is 45% complete (target completion: 4Q25). Meanwhile, the fabrication of the first OSS high voltage direct current (HVDC) platform for TenneT’s 2GW offshore wind farm is expected to start in FY25 (target completion: 2027). The second OSS fabrication is to start by end FY25 (target completion: 2028). The current orders on hand provide MMHE with a strong outlook, ensuring sustained activity and revenue visibility through to 2028. Moreover, the group has a healthy tenderbook, which is valued at MYR7-8bn and split 30:70 between international and domestic jobs. For its marine segment, management believes it still holds a sizeable market share despite the competitive environment. MMHE secured two conversion jobs in 1H24 and successfully entered the Greece market while maintaining its presence in Japan and South Korea. The group expects to sustain this momentum throughout the rest of the year.

• Maintain BUY. We revise our FY24F earnings to MYR88.3m from MYR38.5m to account for the cost recovery claims. We also revise upwards our FY25F-26F earnings by 8.1% and 9.8% on better margins. Our TP is slightly lifted to MYR0.61 based on 0.7x FY25F P/BV or +1.5SD from its 5- year mean given MMHE’s robust orderbook – signalling a strong sector outlook. Our TP includes a 4% discount for its 2.8 ESG score, which is below the 3.0 country median. Key risks include slowdown on replenishments, higher-than-expected material costs, and labour shortages.

Source: RHB Research - 22 Aug 2024