• Keep BUY, with new MYR0.62 TP from MYR0.61, 43% upside. Malaysia Marine & Heavy Engineering’s results exceeded expectations, supported by better margin in the heavy engineering (HE) segment and strong performance in the marine segment. We remain optimistic on its outlook as older and less favourable projects are phased out, making way for new projects with improved terms. This transition is expected to strengthen MMHE's performance and support a more positive growth trajectory moving forward.

• Above expectations. 9M24 core earnings of MYR77.4m accounted for 88% and 90% of our and consensus estimates, largely due to better-than-expected performance of the marine segment and higher margin in the HE segment. 3Q24 revenue rose by 1% QoQ (42% YoY) to MYR906.5m, driven by higher billings from the marine segment, with its topline increasing 18% QoQ and 56% YoY, offsetting softer contribution from the HE segment. Despite the revenue increase, MMHE recorded a core net profit of MYR21.4m (-56% QoQ), mainly from the recognition of substantial cost recovery claims in the previous quarter. MMHE remains in a net debt position (MYR49.4m) due to revolving credit drawn for short-term working capital. No dividend was declared for the quarter.

• Outlook. As of 3Q24, MMHE’s orderbook fell by 12.9% QoQ to MYR5.4bn, down from MYR6.2bn in the previous quarter due to order recognition. Current project updates: The Joint Development Area or JDA field development project is 72% complete (target completion: 2Q25), and the Kasawari Carbon Capture & Storage or CCS is 53% complete (target completion: 4Q25). Meanwhile, the fabrication of the first offshore substation (OSS) high voltage direct current (HVDC) platform for TenneT’s 2GW offshore wind farm is at 3% (target completion: 2027) and the second OSS fabrication is to start by end-FY25 (target completion: 2028). These ongoing projects provide MMHE with a robust outlook, securing activity and revenue visibility until 2028. Additionally, the group has a solid tender book valued at MYR8-9bn, with approximately 21% international and 79% domestic projects. For its marine segment, the group aims to grow its conversion portfolio, leveraging opportunities in upstream activities. MMHE expects rapid LNG fleet expansion to boost repair and maintenance demand, though this may be tempered by deferred LNGC drydocking to meet strong winter demand. Current total dry dock utilisation rate stands at 70-80%.

• Keep BUY. We raise our FY24F-26F earnings by 13%, 14% and 14% on better margin for the HE segment. Our TP is slightly lifted to MYR0.62 based on 0.7x FY25F P/BV, or +1.5SD from its 5-year mean given MMHE’s robust orderbook – signalling a strong sector outlook. Our TP includes a 4% discount for its 2.8 ESG score, which is below the 3.0 country median. Key risks include slowdown on replenishments, higher-than-expected material costs, and labour shortages.

Source: RHB Securities Research - 14 Nov 2024