• Maintain NEUTRAL and MYR0.42 TP, 0% upside. Malaysia Marine & Heavy Engineering’s 1H22 performance was above our and consensus’ expectations, with stronger contribution from the marine business. This was on the back of the border reopening in 2Q22, as well as China’s lockdowns, which enabled the group to gain market share as ship owners opted for alternative shipyards. However, we remain cautious on MMHE’s earnings visibility, as it awaits the engineering, procurement, construction, installation, and commissioning (EPCIC) of Kasawari Phase 2.

• 1H22 results above our and Street’s expectations. The better results were largely due to stronger-than-expected contributions from the marine business. As expected, no dividend was declared.

• Results review. MMHE turned to the black with a MYR4.1m core profit in 2Q22, narrowing the YTD loss to MYR2.6m. The turnaround in 2Q22 was largely attributable to the stronger marine division. The current quarter’s operating profit for the segment increased >100% QoQ to MYR15.1m (excluding reversal of doubtful debts) from MYR3.7m, following the pick- up in dry-docking activities after the reopening of borders. Additionally, higher-value jobs have aided in improving margins. However, this was partially offset by a weaker heavy engineering segment (-61% QoQ) due to lower revenue contribution and the absence of COVID-19 claims. The group also strengthened its net cash position to MYR601.4m (MYR0.38 per share) as of 2Q22.

• Outlook. MMHE’s orderbook decreased by 9.6% QoQ to MYR1.7bn from MYR1.9bn as no new projects were awarded in 2Q22. Current projects on hand include Kasawari (70.2% completed) and Jerun (39.7% completed), while front end engineering design (FEED) for the Kasawari carbon capture and storage (CCS) project awarded in 1Q22 is currently at 36.5% completion. Its tenderbook remains at MYR18-19bn for Jun 2022. Conversely, the marine segment is expected to sustain its strong earnings, even with the reopening of China’s yards, as ship owners view the group’s yard as a safer option, according to management. Management also stated that all slots for 3Q22 have been booked, and current utilisation is at 68%, 76% and 82% for Dry Docks 1, 2 and 3 respectively. However, even with the demand growth for dry-docking activities, the nationwide labour shortage may limit MMHE from capitalising on the demand.

• NEUTRAL. We increase FY22 earnings estimates by 7% to MYR7m on better activities in the marine segment, while maintaining FY23-24 forecasts. Our MYR0.42 TP is also unchanged, pegged to 0.4x FY23F P/BV (-0.5SD from the 5-year mean). Our TP includes a 2% ESG premium, based on MMHE’s 3.1 ESG score. Key risks include a slowdown in order replenishment, higher material costs, and labour shortages.

Source: RHB Research - 18 Aug 2022