Malaysia Marine and Heavy Engineering Holdings Bhd
(Oct 25, 87.5 sen)
Maintain buy with a higher target price (TP) of RM1.06: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) nine months of financial year 2019 (9MFY19) core net loss of RM45 million, versus 9MFY18’s RM98 million, was above our expectations of a full-year net loss of RM57 million. However, the group did not manage to meet consensus full-year forecast of a RM9 million loss.

The variance versus our forecast was largely attributed to a better-than-expected third quarter (3Q) performance from the heavy engineering segment. This was on a higher progress from ongoing projects — for example, mainly the Bokor central processing platform (CPP) and a new order intake. As a result, coupled with a steady marine profit, the group’s quarterly losses almost halved sequentially.

The much-improved 9MFY19 results translated into more than half of the previous year’s loss. This was mainly underpinned by a surge in contribution from the marine segment — which turned around from massive earnings before interest and tax (Ebit) losses of RM49 million for 9MFY18. The marine segment’s impressive turnaround was mainly driven by higher conversion works and dry docking services on liquefied natural gas (LNG) carriers. We believe this was driven by increased ship upgrades and maintenance activities for LNG vessels, catalysed by the looming implementation of International Maritime Organisation 2020’s (IMO 2020) sulphur cap regulations.

In line with better-than-expected 3Q results, we effect the following changes to our forecast assumptions — lowered fabrication yard costs and a raised volume of marine repair works. As a result, our FY19 forecasts are revised to a loss of RM49 million versus a RM57 million loss previously.

We maintained our “buy” call on MMHE on a normalisation of dry docking activities after the IMO 2020 which may accelerate an earnings turnaround; a possibility that MMHE may diversify beyond Malaysia via new tender awards from Saudi Aramco; and a massive new Kasawari engineering, procurement, construction, installation and commissioning (EPCIC) project worth RM2.2 billion secured in 2Q will anchor medium-term earnings and keep the group busy for three to four years. We expect a meaningful profit contribution following this project’s ramp-up in FY20. — TA Securities, Oct 25