Malaysia Marine and Heavy Engineering Holdings Bhd
(Feb 13, 79 sen)
Upgrade to buy with an unchanged target price (TP) of 89 sen: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) fourth quarter of financial year 2019 (4QFY19) core profit of RM20 million (from core losses of RM4.7 million quarter-on-quarter [q-o-q], RM7.6 million year-on-year [y-o-y]) brought full-year FY19 core net losses to RM26.6 million (versus core losses of RM112.9 million y-o-y), being slightly below our and consensus’ FY19 full-year loss forecasts of RM22 million (21%) and RM29.2 million (9%) respectively. The deviations stemmed from a slower recovery in their heavy engineering segment (revenue: -11.2% y-o-y, operating profit: >-100% y-o-y). No dividend was declared, as expected.

 
MMHE turned the corner, recording a core profit of RM20 million for 4QFY19 (from -RM4.7 million q-o-q), after adjusting for unrealised foreign exchange losses of RM2.1 million and allowances for impairment losses on receivables of RM8.6 million. Apart from a stronger showing from the marine segment (revenue: +25.2% q-o-q, operating profit: 108% q-o-q), MMHE benefitted from a one-off tax credit from the Inland Revenue Board of Malaysia amounting to about RM6 million, resulting in positive tax. The management expects this to be a one-off event.

Its revenue improved by 0.9% y-o-y to RM275.6 million, with declines in heavy engineering (-33.7% y-o-y) being offset by improvements from the marine segment (+158.4% y-o-y). Losses continue to narrow on improvements in operating margins (blended basis: 4QFY18: -107% versus 4QFY19 +0.6%). Additionally, its 4QFY19 recorded a higher positive tax of RM6.4 million (versus RM500,000 million tax for 4QFY18).

Revenue improved by 3.6% y-o-y to RM1 billion, while losses continue to narrow (FY18: -RM112.9 million versus FY19: -RM26.6 million), thanks to the strong showing from the marine segment partially offset by a decline in profitability at heavy engineering post-sail away projects.

Following the recent Bekok engineering, procurement, construction, installation and commissioning (EPCIC) and Bergading central processing platform-mercury removal unit project wins, MMHE’s order book stood at a healthy RM2.96 billion as of end-FY19 (of which about 70% can be attributed to the Kasawari EPCIC award), while its tender book was at a solid RM12.9 billion. Meanwhile, the first steel cut for the Kasawari project was undertaken in January 2020, but we should only expect project billings to accelerate from the second half onwards.

We continue to expect the marine segment to improve in the coming quarters on higher dry-docking activities coupled with upgrading and retrofitting works for liquefied natural gas vessels with the implementation of the International Maritime Organization 2020. Dry Dock 1 recorded a 91% utilisation rate, and Dry Dock 2 with 78% for FY19 respectively. Dry Dock 3 was at 86.6% completion stage as of 4Q19 and is expected to commence operations by 3Q20.

We are keeping our FY20-FY21 numbers on the back of nascent signs of earnings improvement coupled with expectations of higher activities for FY20.

Our TP is maintained at 89 sen pegged at 0.6 times FY20 book value per share. We expect MMHE to turn around in FY20. We upgrade to “buy” from “hold” given the selldown since our last report (-12.4%) and on nascent signs of earnings improvement. Furthermore, the stock is backed by 31 sen/share in net cash or about 40% of its current market capital. — Hong Leong Investment Bank Research, Feb 13