Review

• Malaysia Marine Heavy Engineering’s (MHB) 1HFY23 core net loss of RM382.3mn (1HFY22: RM1.3mn core profit) came in below expectations. We previously forecasted a core profit of RM90.3mn while the consensus forecast was core profit of RM68.4mn. The earnings miss was largely attributed to additional cost provisions following the delay in the schedule for ongoing projects.

• YoY: 2QFY23 revenue more than doubled YoY to RM1.1bn driven by higher progresses for ongoing projects in the Heavy Engineering segment (more than tripled YoY), which more than offset the revenue decline in the Marine segment (-27.9% YoY). MHB’s yard received 19 vessels for repair and maintenance works in 2QFY23 compared with 28 in 2QFY22. Nonetheless, the group swung from operating profit of RM25.8mn to operating loss of RM385.3mn in 2QFY23, dragged by additional cost provisions for ongoing projects in the Heavy Engineering segment. The cost provisions are estimated to be c.RM400mn as management revealed that the Heavy Engineering segment will break even without the provisions.

• QoQ: Revenue more than doubled QoQ in 2QFY23 on the back of significant revenue growth in the Heavy Engineering segment. However, MHB registered operating loss in the quarter compared with operating profit of RM7.0mn in 1QFY23 due to cost provisions mentioned above.

Key Takeaways From Conference Call

• Engineering Segment: MHB disclosed that the additional cost provisions from the delay in schedule is due to additional operational works from MHB and partly due to additional works requested by clients. The provision excludes any potential cost recovery from clients. MHB is working towards full recovery of costs and expect to receive any recovery by the end of this year. Fortunately, management is also optimistic that no further provision is expected at this juncture. Meanwhile, MHB continues to face challenges in executing ongoing projects due to inflationary pressure and supply chain disruption. To mitigate future cost overrun during procurement, MHB intends to shift away from being a turnkey solution provider to other models such as cost plus model where the procurement is partially carried out by customers.

• Marine Segment: MHB is facing heightened competition from shipyards in China following reopening of China borders. However, the segment has slowly picked up in demand in August 2023.

Impact

• We slash our earnings forecasts to -RM82.4mn/RM74.4mn/ RM95.0mn for FY23/FY24/FY25 respectively after accounting for the followings: i) assumption that the group manages to recover c.70% of the additional cost provision; ii) higher overall cost assumptions for the Engineering segment; iii) lower number of forecasted vessels secured.

Outlook & Valuation

• MHB’s latest orderbook (as at end of June 2023) of RM6.2bn would provide earnings visibility up to 2025 while the tenderbook amounts to RM5bn-6bn. The group is looking at securing renewable energy (offshore wind) and decarbonisation sectors’ (carbon capture and storage) contracts to sustain and grow its order book.

• After adjusting our earnings forecasts, we lower MHB’s target price to RM0.51/share (previous: RM0.62/share) based on 11x CY24 EPS. Upgrade MHB to Hold due to the higher upside potential following the recent weakness in its share price.

Source: TA Research - 17 Aug 2023