Review

• Malaysia Marine Heavy Engineering’s (MMHE) 9M19 core net loss of RM45mn (9MFY18: RM98mn) was above our expectations of full-year net loss of RM57mn. However, the Group did not manage to meet consensus’ full-year forecast of RM9mn loss.

• The variance versus our forecast was largely attributed to better than expected 3Q19 performance from the Heavy Engineering segment. This was on the back of higher progress from ongoing projects (i.e. mainly Bokor CPP) and new order intake. As a result of the above, and coupled with a steady Marine profits, the Group’s quarterly losses almost halved sequentially.

• The much improved 9M19 results translate to more than half of the previous year’s loss. This was mainly underpinned by a surge in contribution from the Marine segment – which turned around from massive EBIT losses of RM49mn in 9M18. Marine’s impressive turnaround was mainly driven by higher level of conversion works and dry docking services on LNG carriers. We believe this was driven by increased ship upgrades and maintenance activity for LNG vessels- catalysed by looming implementation of IMO2020 sulphur cap regulations.

Impact

• In line with better than expected 3Q19 results, we effect the following changes to our forecast assumptions: (1) lowered fabrication yard costs and (2) raised volume of marine repair works. As a result, our FY19 forecasts are revised to RM49mn loss (previous: RM57mn loss).

Valuation

• In tandem with the revision in our earnings forecast, our target price (TP) for MMHE is raised marginally to RM1.06 (previous: RM1.05) based on unchanged 0.7x CY20 P/B.

• Maintain Buy on MMHE on the back of: (1) normalization of dry docking activities post IMO 2020 may accelerate earnings turnaround, (2) possibility that MMHE may diversify beyond Malaysia via new tender awards from Saudi Aramco, and (3) RM2.2bn massive new Kasawari EPCIC project secured in 2Q19 will anchor medium term earnings and keep the group busy for the next 3-4 years. We expect meaningful profit contribution following this project’s ramp-up in FY20.

Source: TA Research - 25 Oct 2019