Review

• MMHE’s 1Q17 core net loss of RM6mn (1Q16: RM22mn profit, 4Q16: RM41mn loss) underperformed our full-year expectations of RM7mn loss. The earnings miss was more pronounced versus consensus’ forecast of RM35mn profit. Headline net loss of RM16.7mn includes FX losses of RM11.2mn.

• We attribute the dismal results to disappointing Marine earnings, and higher-than-expected overheads at the Heavy Engineering (HEng) segment. Amidst an exhausted orderbook, chunky recognition of change orders for Malikai TLP in 1Q17 failed to turnaround earnings.

• There was weakness in the Marine segment where the operating profit contracted 40% YoY to RM9.4mn. However, according to management, excluding an undisclosed chunky one-off settlement in 1Q16, marine profits were higher due to increased conversion works. Recall that marine earnings have been largely resilient in the past, whereby quarterly profits averaged RM21mn in 2015-16.

Outlook

• We estimate that MMHE has an outstanding orderbook of RM2bn, which includes its recent major RM1.0bn project win, Bokor Phase 3 CPP. The other chunky singular project comprises RAPID Packages 5 and 3 (12%/RM245mn). Meanwhile, marine orders (RM170mn) account for 8%, whilst the balance consists of smallish projects. More projects sailed away from MMHE’s yard in 1Q17, including F12 Kumang, Besar-A, and Baronia.

Impact

• We lower our assumptions of marine orders and factor in higher fixed overheads. As a result, our FY17/18/19 forecasts are revised to RM19mn loss/21mn/43mn (previous: RM7mn loss/24mn/48mn).

Valuation

• Following the earnings downgrade, our TP is lowered to RM0.95 (previous: RM0.96) based on unchanged 0.6x CY18 P/B. We do not expect earnings to recover in the near term due to the sustained O&G capex freeze. Furthermore, MMHE’s square accounting method implies back-end loaded profit recognition.

Source: TA Research - 28 Apr 2017