This article first appeared in The Edge Financial Daily on August 6, 2019

Malaysia Marine and Heavy Engineering Holdings Bhd
(Aug 5, 81.5 sen)
Maintain hold with an unchanged target price (TP) of 83 sen: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) first half of financial year 2019 (1HFY19) revenue grew 17% year-on-year (y-o-y) to RM480 million on the back of higher progress billings from heavy engineering and marine business unit activities. This contributed to its core losses narrowing to RM43 million (from RM87 million for 1HFY18), aside from a large variation order in the second quarter (2Q). Nevertheless, the results still proved to be disappointing due to stubbornly low margins for the heavy engineering unit, which made up 58% of its 1HFY19 revenue.

The marine business swung back into profit in 2QFY19, after five consecutive quarters of losses, as revenue increased by 46% y-o-y. This was attributable to higher dry-docking activities on liquefied natural gas carriers and the refurbishment of Velesto Energy Bhd’s Naga 2 and five drilling rigs. The 2HFY19 pipeline looks promising as MMHE expects activities to pick up strongly, supported by vessel upgrading works and retrofitting to comply with International Maritime Organisation 2020 regulation and rig order increases.

The current outstanding order book saw a big jump to RM3 billion (from March 2019 of RM864 million) following the Kasawari contract being secured recently. The project is expected to have its first steel cut by early-2020, and to be completed in 40 months. The Bokor central processing platform project, currently the biggest portion of its order book, is now 59% completed (from 49.4% in March 2019) and targeted to be completed by mid-3QFY20.

We widen our FY19 loss to RM37 million (from RM27 million) as we impute a lower margin for the heavy engineering segment. 2HFY19 could potentially see more variation orders recognised, contributing to narrower losses. We reaffirm our “hold” rating with an unchanged TP of 83 sen, pegged at 24 times FY20 earnings per share estimate. Risks include weaker/higher execution margins and potential big variation orders to be recognised that could boost earnings. — Affin Hwang Capital, Aug 5