Review

• Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) 1QFY24 results came in at 18% of our and 17% of consensus’ full-year forecasts. We deem the result to be within expectations as we expect recovery of cost provisions in coming quarters which would boost earnings.

• QoQ: Revenue dropped 12.0% QoQ on the back of lower progress for projects in the Heavy Engineering segment (segmental revenue -14.8% QoQ). Core profit decreased 15.5% QoQ driven by lower operating profit in Heavy Engineering segment (-96.2% QoQ) in tandem with the drop in segmental revenue and the partial recognition of cost recovery in 4QFY23. This was despite more than sixfold improvement in operating profit for the Marine segment, which we attribute to higher value repairs that typically command better margins. This can be evidenced by the higher segmental revenue of 17.5% QoQ although securing lower number of vessels for repairs compared to the preceding quarter.

• YoY: 1QFY24 revenue soared 98.4% YoY due to higher progress billing from ongoing projects in the Heavy Engineering segment and greater number of vessels secured for repair activities. The core profit more than doubled YoY in line with the turnaround in the Heavy Engineering segment with greater progress of ongoing projects (segmental revenue +115.0% YoY) while Marine segment also recorded improved operating profit (+6.9% YoY) supported by greater dry-docking and repair services.

Impact

• No change to earnings forecasts.

Outlook

• Engineering Segment: After three consecutive quarters of recognising cost provisions, MHB has not disclosed any provisions in the financial release for 1QFY24, which is a good sign for the group. With Jerun Project progressing towards completion, there may be risk of further cost provision in the coming quarter. However, we expect the group to register some cost recoveries in the coming quarter as some of the previously recognised cost provisions are due to additional works requested by clients. We expect improved performance QoQ and YoY in 2QFY24.

• Marine Segment: Competition is expected to remain stiff given the presence of new LNG carrier repair yards in China and neighbouring countries. We expect the operating profit to drop QoQ in 2QFY24 unless MHB can continue to secure high value repair jobs.

Valuation

• Considering the better earnings prospect, we raise our P/B valuation for MHB from 0.6x to 0.65x, hence raising our TP to RM0.55/share (previous: RM0.51/share) pegged to 0.65x CY25 P/B ratio. Maintain Hold.

Source: TA Research - 27 May 2024