Additional Report
- We maintain our HOLD recommendation on Malaysia Marine and Heavy Engineering Holdings (MMHE) with an unchanged fair value of RM0.78/share based on a 50% discount to its FY17F book value given the group's potential losses and impairment provisions towards the end of the year.
- MMHE’s forecasts are maintained for now even though its 9MFY17 loss of RM14mil appears to be not as poor as our expectation, accounting for only 29% of our FY17F loss. However, the loss is already above street’s RM8mil. The group did not declare any interim dividend as expected due to the losses.
- The group’s 3QFY17 rebound to a net profit of RM16mil from a 2QFY17 loss stems from RM24mil lumpy recognition of change orders for the completed Malikai and Gumusut-Kakap platform projects as well as Cendor FPSO conversion job, even though revenue declined 16% QoQ to RM215mil.
- As a comparison, MMHE recognized RM36mil of change orders in 2QFY17, which drove its revenue up by 9% QoQ, while still registering a loss of RM14mil.
- We understand that there may be up to RM35mil of balance change order to be recognized from these completed projects. While a full recognition of these items may deliver a positive 4QFY17 bottomline, we remain cautious of any potential impairment given the group’s declining order book.
- As the group did not secure any substantial orders over the past 3 months, MMHE's outstanding order book has dropped by 13% QoQ from RM1.6bil to RM1.4bil- 1.4x FY17F revenue.
- Excluding unrealized forex losses, MMHE’s 9MFY17 net profit plunged 82% YoY to RM7mil as its revenue decreased 20% YoY from insufficient projects reaching the group’s revenue-recognition progress threshold while the Malikai tension leg platform, F12 Kumang, Besar, Bergading and Baronia structures have been completed in 2QFY17.
- MMHE's yard utilisation is still expected to remain below 50% until 2Q2018 when the RM1bil Bokor central processing platform project, expected to be completed in 2Q2020, has reached steel cutting threshold.
- Given that the group does not account for any profit contribution until its projects have reached the completion stage of 50%, the Bokor job, which accounts for 63% of MMHE’s outstanding order book, is unlikely to significantly contribute to the group's weak FY17F-FY18F earnings prospects.
- Hence, the stock currently trades at a fair P/BV of 0.5x due to the likelihood of further losses against the backdrop of the upstream sector's slow project rollouts.
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The information and opinions in this report were prepared by AmInvestment Bank Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmInvestment Bank Bhd. Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmBank Group Bhd and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice.
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