Review

• Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) 2QFY24 results came in above expectations at 131% of ours and 121% of consensus’ full-year forecasts. The earnings outperformance was primarily due to higher-than-anticipated recognition of cost recovery claims.

• QoQ: Revenue dropped by 8.6% QoQ on the weakness of both their segments; Heavy Engineering segment (-6.9% QoQ), Marine segment (-21.5% QoQ). However, core profit increased to 79.1% QoQ driven by recognition of cost recovery claims in Heavy Engineering.

• YoY: 2QFY24 revenue dropped by 14.8% YoY due to weakness in the Heavy Engineering segment (-18.3% YoY). This is despite the increase of 38.5% YoY from the Marine segment, mainly due to higher dry-docking activities and repair services for Floating Production Storage and Offloading unit. However, core profit turn from LBT of RM385mn to PBT of RM79.1mn, also driven by the recognition of cost recovery claims in Heavy Engineering.

• Jerun Project and Rosmari-Marjoram Project is progressing 99% and 95% towards completion while 4 projects are under construction at MMHE West and East Yard. Moreover, MHB was awarded a second offshore wind project, for the Nederwiek 1 Project from Petrofac. Nederwiek 1, part of TenneT’s landmark 2GW Programme in the Netherlands that is worth RM1.5bn. The duration of the project is approximately 36 months, with fabrication to begin in 2025 and completed by 2028.

• The Group’s total assets and total equity at the end of the period under review stood at RM3.9bn and RM1.4bn, respectively.

Impact

• We increase our earnings forecast for FY24/FY25/FY26 by 132.8%/126.1%/149.5% to reflect the higher performance of Q2 results while anticipating more recognition of cost recovery claims ahead.

Outlook

• Engineering Segment: MHB has secured an order book valued at RM6.1bn, which will support the company through to 2028. They are also targeting to increase their Heavy Engineering tender book to around RM7- 8bn. We anticipate earnings opportunities emerging from this robust pipeline.

• Marine Segment: Investments by oil majors in upstream activities are expected to create opportunities for the Marine segment, particularly in conversion projects. The segment is also working to expand its LNG carrier (LNGC) customer base, given the increasing number of carriers in the market. However, competition remains a challenge due to the emergence of new LNGC-repair yards in neighbouring countries and China.

Valuation

• Considering the better results and incorporating ESG Premium of 3%, we raise our TP to RM0.61/share (previous: RM0.55/share) pegged to 0.65x CY25 P/B ratio. Following the weakness in its share price, we upgrade it from HOLD to BUY.

Source: TA Research - 22 Aug 2024