Review

• Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) 4QFY23 results came in below expectations. FY23 core net loss was RM463.8mn (FY22: RM44.7mn core profit). We forecasted a core loss of RM398.9mn while the consensus forecast was core loss of RM132.3mn. The earnings miss was largely attributed to lower-than-expected cost recovery.

• QoQ: Revenue surged 75.2% QoQ on the back of higher progress for projects in the Heavy Engineering segment (segmental revenue +78.9% QoQ) and greater number of vessels secured for dry-docking activities. MHB secured 23 vessels in 4QFY23 compared with 11 in the preceding quarter. As a result of cost recovery, MHB registered operating profit of RM10.9mn compared with operating loss of RM100.2mn in the preceding quarter.

• YoY: 4QFY23 revenue more than doubled YoY driven by higher progress for ongoing projects in the Heavy Engineering segment (segmental revenue more than tripled YoY). Operating profit grew 11.4% YoY as the Heavy Engineering swung into the black (from operating loss of RM14.2mn to operating profit of RM7.4mn in 4QFY23) supported by partial recognition of cost recovery negating additional cost provisions due to delayed schedule, inflationary pressure and supply chain disruptions.

Key Takeaways From Conference Call

• Management did not disclose the amount of cost provision or the cost recovered in 4QFY23 but we believe the disparity between both is minimal.

• Regarding future cost provisions, MHB maintains that the group has provided for any cost provisions that they can reliably estimate and anticipate with high amount of certainty.

• Labour cost is expected to continue rising in FY24, but not as steeply as in FY23.

Impact

• After incorporating FY23 numbers and factoring in higher cost recovery in FY24 and FY25, we raise our FY24/FY25 earnings forecasts by 31.7%/21.5% respectively.

Outlook

• Engineering Segment: We believe the group’s cost provision has continuously decreased QoQ since 2QFY24. MHB continues to face challenges in executing ongoing projects (particularly Jerun Project announced in April 2021) due to inflationary pressure and supply chain disruptions. We expect cost provisions to be much lower moving forward due to the group’s improved contracting strategies (alliance concept, reimbursable or cost-plus basis) for newer projects.

• Marine Segment: Competition remains stiff given the presence of new LNG carrier-repair yards in China and neighbouring countries. We do not expect much earnings growth for the segment in FY24.

• MHB’s latest orderbook (as at end of December 2023) of RM6.3bn provides earnings visibility up to 2027. The group is looking at securing renewable energy (offshore wind) and carbon capture and storage contracts to sustain and grow its orderbook.

Valuation

• After inputting FY23 book value numbers (which came in much lower than our previous forecasts) and rolling forward our base year, we lower the TP to RM0.51/share (previous: RM0.53/share) pegged to 0.6x CY25 P/B ratio. Maintain Hold.

Source: TA Research - 15 Feb 2024