Review

• Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) 3QFY23 results performance came in below expectations. 9MFY23 core net loss was RM473.6mn (9MFY22: RM11.2mn core profit). We previously forecasted a core loss of RM82.4mn while the consensus forecast was core profit of RM34.7mn. The earnings miss was largely attributed to further cost provisions for ongoing Heavy Engineering projects.

• YoY: 3QFY23 revenue grew 56.0% YoY driven by higher progresses for ongoing projects in the Heavy Engineering segment (segmental revenue +78.1% YoY), which more than offset the revenue decline in the Marine segment (-23.5% YoY) from lesser vessels secured. Note that MHB’s yard received 11 vessels for repair and maintenance works in 3QFY23 compared with 28 in 3QFY22. Nonetheless, the group swung from operating profit of RM19.1mn to operating loss of RM100.2mn in 3QFY23, dragged by additional cost provisions for ongoing projects in the Heavy Engineering segment. The cost provisions were due to delayed schedule and price escalation of the projects.

• QoQ: Revenue dropped 39.6% QoQ in 3QFY23 on the back of plunge in revenue in the Heavy Engineering segment (-42.5% QoQ). As a result of lower cost provision compared with 2QFY23, MHB registered a narrower operating loss of RM100.2mn compared with RM385.3mn in the preceding quarter.

Impact

• We slash our earnings forecasts for FY23/FY24/FY25 to -RM398.9mn/ RM34.3mn/RM41.8mn respectively to incorporate the higher cost provisions for ongoing projects and factor in lower proportion of recovery from the cost provisions.

Outlook

• Engineering Segment: Management previously guided in the last analyst briefing that no further cost provision is expected. Hence, the cost provision in the current quarter came in as a surprise. MHB did not disclose the amount of additional cost provisions for the current quarter. Note that the cost provision in 2QFY23 is circa. RM400mn. The group is working towards full recovery of costs and is hopeful to receive any recovery by the end of this year. We understand that MHB has managed to make some successful recoveries in 3QFY23. Meanwhile, MHB continues to face challenges in executing ongoing projects due to inflationary pressure and supply chain disruption from geopolitical conflicts.

• Marine Segment: MHB anticipates demand for energy shipment to rise particularly in Far East countries and Europe in the upcoming winter, hence slower dry-docking activities in the coming quarter. Competition remains stiff especially from shipyards in China.

• MHB’s latest orderbook (as at end of September 2023) of RM5.7bn would provide earnings visibility up to 2025 while the tenderbook amounts to RM2bn-3bn. 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.

Valuation

• Following adjustments in our earnings forecasts, we lower MHB’s target price to RM0.53/share (previous: RM0.64/share) pegged to 0.6x CY24 P/B ratio. Downgrade MHB to Hold from Buy.

Source: TA Research - 9 Nov 2023