This article first appeared in The Edge Financial Daily, on April 29, 2016.

Malaysia Marine and Heavy Engineering Holdings Bhd
(April 28, RM1.12)
Downgrade to sell with a lower target price (TP) of 81 sen: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MHB) first quarter of financial year 2016 (1QFY16) net profit remained in the red for the second consecutive quarter at a loss of RM7.6 million. However, the more worrying issue at hand is the revenue, which is at its lowest recorded level since listing in 2010.

The company’s 1QFY16 revenue slumped by 64% year-on-year (y-o-y) to only RM256.7 million. Excluding the net unrealised foreign exchange loss of RM37.4 million, MHB’s normalised earnings would have been RM29.8 million.

This is in line with our original earnings estimate, which we are now sceptical it can be met.

Revenue from the offshore segment slumped by 77.9% y-o-y to RM136.4 million, while registering an operating loss of RM26.1 million. The dismal result is largely due to depleting ongoing projects, tail-end projects and early-stage projects.   

Its marine division, a relatively minor business segment, is slowly transforming into MHB’s main revenue and earnings driver. However, in the near to medium term, it is unlikely that the marine segment will be able to match the revenue contributions from the offshore segment seen during yesteryears.

Both revenue and earnings increased by 16.6% y-o-y and 0.4% y-o-y to RM120.3 million and RM15 million respectively.

The favourable performance is attributable to the higher value of vessels repaired from the liquefied natural gas, rigs, floating storage unit, and floating production, storage and offloading categories.

Without significant new job wins, MHB’s current order book has declined to RM1.027 billion compared with RM1.121 billion as at end-December 2015.

A portion of the order book is from the five refinery and petrochemical integrated development (Rapid) packages worth a collective RM313 million.

With a cash level of around RM922.8 million, the company is currently debt-free and has a net tangible asset per share value of RM1.67.  

Out of the potential RM7.4 billion worth of tenders and proposals for 2016 and 2017 identified by the group, MHB has submitted bids worth RM1.75 billion for 2016.

In light of the depleting order book and size of potential new jobs, we are revising downwards our earnings assumptions for FY16 and FY17 by 21.3% and 24.6% respectively.

We do not foresee any near-term rerating catalyst, which would allow the company to achieve revenues in excess of more than RM2 billion in the foreseeable future.

As such, we are downgrading MHB to “sell” (previously neutral) with a revised TP of 81 sen per share (previously RM1.01).

Our TP is based on our house mid-cap oil and gas service provider target price-earnings ratio  of 14 times pegged to 2017 earnings per share of 5.8 sen.

The focus for the company moving forward now is on the expansion of the marine segment and also jobs from the Rapid project. — MIDF Research, April 28