This article first appeared in The Edge Financial Daily on February 9, 2018

Malaysia Marine and Heavy Engineering Holdings Bhd
(Feb 8, 85 sen)
Upgrade to market perform with a higher target price (TP) of 82 sen: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) core net profit (CNP) for the financial year 2017 (FY17) ended Dec 31, 2017 of RM53.9 million came above expectations against our and consensus full-year loss estimates of RM3.1 million and RM3.9 million, respectively. The surprisingly strong results were largely due to: stronger-than-expected variation orders from heavy engineering segment and unexpected deferred taxation credit. A dividend per share of three sen was declared, which was also a positive surprise to us.

MHB’s CNP jumped 1.7 times quarter-on-quarter to RM46.3 million in fourth quarter of FY17 (4QFY17), largely helped by a stronger heavy engineering segment, which posted a profit of RM11.3 million from a RM2.1 million loss in 3QFY17 and a higher tax credit (RM20.9 million versus RM400,000 in 3QFY17). We understand that the stronger heavy engineering segment was due to recognition of additional variation orders from the completed projects such as SK316 and Malikai projects. Year-on-year (y-o-y), even though revenue dropped by 18%, MHB managed to return to the black from a core loss of RM40.3 million in 4QFY17, thanks to a better heavy engineering segment offsetting poorer performance from the marine segment (-76%). Cumulatively, it also booked a CNP of RM53.9 million in FY17 from a slight loss of RM1.4 million a year ago, mainly driven by a narrowing loss from the heavy engineering segment, led by recognition of variation orders and RM21.4 million tax credit (versus RM12.8 million tax expense). This helped cushion the weaker marine segment (-40%), which had a lower number of vessel repaired in FY17.

MHB’s order book fell to RM1.3 billion from RM1.4 billion in 3QFY17 without a major contract win during the quarter. Its current tenders remain at RM4 billion of which about 80% are related to local projects. We gather that tender enquiries are on an uptrend but timing of award remains uncertain. The company will still focus on its existing core businesses while seeking floater conversion jobs internationally.

With the higher-than-expected recognition of variation orders and a higher tax credit, we increase our FY18 earnings estimate by 40% to RM30.6 million. Meanwhile, a FY19 earnings estimate of RM45.2 million (48% y-o-y growth) is introduced, assuming RM500 million order-book replenishment and 10% growth in marine revenue.

MHB’s net cash position improved to RM675 million in 4QFY17 from RM614.9 million in 3QFY17, which is equivalent to 42 sen per share. All in, we believe MHB should warrant a slight rerating from its trough valuation with a better medium-term outlook. Thus, we upgrade the counter to “market perform” with a higher TP of 82 sen (from 65 sen previously) pegged to FY18 price-to-book value of 0.5 times (from 0.4 times), which is below the -1.0 standard deviation of its average mean valuation. — Kenanga Research, Feb 8