MMHE’s second quarter in the red�� receives mixed outlook
KOTA KINABALU: Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) has suffered a net loss for its second quarter of financial year 2018 (2QFY18) of RM49.8 million caused by lower revenue recognition in the quarter.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the group’s revenue for the first six months of FY18 (6MFY18) had slumped by 16.6 per cent year over year (y-o-y) due to lower recognition from tail-end projects, commencement of new projects and deferments of dry docking activities.
In the heavy engineering segment, revenue declined by 12.8 per cent y-o-y as 2QFY18 saw the completion of the FSO Bechamas 2 external turret and Sepat– A WHP while the RM1 billion Bokor Phase-3 redevelopment CPP is still only at 16 per cent completion and will only undergo its first steel cut in 3QFY18 while the large portion of works will only occur in FY19.
In the marine segment, revenue declined by -14.1 per cent y-o-y as vessel owners deferred their dry-docking to a later period in light of changes in local shipping regulations and the sail away of the FSOs.
“In addition, additional costs were also incurred on conversion with revenue recognition pending verification and approval,” added the research arm.
Researchers with Kenanga Investment Bank Bhd (Kenanga Research) saw that the deferment of dry docking activities was due to the new International Maritime Org (IMO) regulations that have imposed stricter Sulphur oxide emission allowance by Jan 1, 2020.
“This put vessel owners in a dilemma whether to install scrubber or burn cleaner fuel such as LNG. The contemplation between these two options which require modification and investment to their existing vessels have led to deferment to dry docking activities,” explained the research arm.
Overall, the higher-thanexpected cost provisions in the groups two segments came as quite a shock for analysts and have prompted many to slash their earnings estimates and ratings as they now view the delays in Bokor to be rather detrimental and expect that MMHE will continue staying in the red for now.
Affin Hwang Capital explains that as most of the EPCIC profits are back-loaded towards the second half of the projects, the Bokor project’s profit recognition will only begin after achieving its 25 per cent milestone.
“This is likely to be pushed back from the initial 3Q 18 timeline to 4Q18 as management guided that Bokor will only hit slightly over 25 per cent by the end of 2018,” Affin Hwang Capital.
On the other hand, AmInvestment Bank Bhd (AmInvestment Bank) remains largely optimistic on the stock as they believe that the group is underpinned by a rising momentum of offshore job prospects globally against a backdrop of improved oil price outlook.
“Notwithstanding its 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 per cent quarter over quarter (q-o-q) to RM4.3 billion which comprises of 34 per cent local and 66 per cent foreign composition and excludes an additional RM2.7 billion potential projects.
“The stock currently trades at a compelling Price over book value ratio (PBV) of 0.5-fold amid receding impairment risks and rising order flows,” justified the bank.
AmInvestment Bank is maintaining its buy call on MMHE with an unchanged fair value of RM1.13 per share based on a 25 per cent discount to its FY18F book value.
Meanwhile, both Kenanga Research and AffinHwang Capital downgraded their calls on the stock with a lower target price (TP) of RM0.695 and RM0.70 per share respectively.
They believe that MMHE would see no reprieve in the shortterm as it is expected that the group will see prolonged period of losses while continuing to be plagued by its overreliance on the thin margin Bokor project which is circa 80 per cent of its 1.1 billion outstanding orderbook.
While group has several large tenders lined up, both analysts highlight that these have yet to be translated into awards and that the risks to their call would be stronger-than-expected contract wins and margins.
Meanwhile MIDF Research is taking the middle ground, maintaining its neutral stance on MMHE with a lower TP of RM0.73.