This article first appeared in The Edge Financial Daily on August 3, 2018

Malaysia Marine and Heavy Engineering Holdings Bhd
(Aug 2, 72 sen)
Maintain buy with an unchanged fair value of RM1.13: While Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) financial year ending Dec 31, 2019 forecast (FY19F) and FY20F earnings are unchanged, we have reversed our earlier FY18F net profit of RM12 million to a loss of RM21 million on higher operating cost assumptions due to the weaker-than-expected first half of FY18 (1HFY18) results. Note that our earlier FY18F net profit of RM12 million was already less than half of street’s estimate of RM25 million. No interim dividend was declared as expected.

Excluding unrealised foreign exchange (forex) gains/loss and one-off provisions, MHB registered a 1HFY18 core loss of RM83 million versus a RM13 million loss in 1HFY17. Revenue declined 17% due to a depleting order book coupled with additional cost overruns from Refinery and Petrochemical Integrated Development (Rapid) Package 5 and the conversion jobs for floating storage and offloading vessels (FSOs) Benchamas 2 and Bergading, which are in the process of being negotiated and compensated by the clients.

The second quarter ended June 30, 2018 (2QFY18) revenue increase rose 19% quarter-on-quarter (q-o-q) from the completion of FSOs Benchamas 2 and Bergading together with the Sepat wellhead platform topside and substructure.

Recall that we have already highlighted that MHB’s 1HFY18 performance will be weak as its yard utilisation remain well below its break-even of 50% as many of its previous projects — SK316, Bergading and Baronia central processing platforms (CPPs)  — have already sailed away while substantive projects have yet to reach the stage of profit recognition.

The Bokor CPP, which accounts for the bulk of the group’s order book, is presently at the engineering stage with only 16% progress completion as at June 30, 2018, and with a slight lag from procurement, will only reach 25% by 4QFY18 for profit recognition.

Together with the recognition of change orders potentially worth RM30 million from the cost overruns, we do not expect the low profit contribution from the initial phase of the Bokor CPP to reverse MHB’s bottom line to the black by year end.

Notwithstanding the 6% q-o-q contraction in MHB’s outstanding order book to RM1.1 billion in the absence of large order intakes, prospects are significantly improving with the group’s tenders surging by 54% q-o-q to RM4.3 billion (comprising 34% local and 66% foreign composition), excluding additional RM2.7 billion potential projects. — AmInvestment Bank, Aug 2