KUCHING: Malaysia Marine and Heavy Engineering Bhd’s (MMHE) managed to end FY17 with a bang as their core net profit (CNP) of RM53.9 million came in way above street full-year estimates of a RM3.9 million loss.
In a results note, Kenanga Investment Bank Bhd (Kenanga research) guided that the surprisingly strong results were largely due to a stronger-than-expected variation orders from the group’s heavy engineering segment, and an unexpected deferred taxation credit.
For 4QFY17, MMHE’s heavy engineering segment saw a return to profit of RM11.3 million from RM2.1 million losses in 3QFY17 and a higher tax credit of RM20.9 million versus RM0.4 million in 3QFY17.
“We understand that the stronger heavy engineering segment was due to recognition of additional variation orders from the completed projects such as SK316 and Malikai projects.
“Year over year (y-o-y), even though revenue dropped by 18 per cent, MMHE managed to return to the black from core losses of RM40.3 million in 4QFY17, thanks to better heavy engineering segment offsetting the poorer performance of marine segment which saw a -76 per cent decrease,” said the research arm.
Following the release of MMHE’s unexpected positive quarterly results, the group declared an interim dividend of 3 sen.
Looking forward however, AmInvestment Bank Bhd (AmInvestment Bank) stated that they acknowledge the group’s 1HFY18 results performance will be weaker given its yard utilisation will drop below 50 per cent in 2QFY18 from the current 53 per cent.
Currently, MMHE’s Bokor central processing platform, which accounts for the bulk of the group’s order book, is only in its engineering stage with 6 per cent progress completion and will only reach steel-cutting stage in 3QFY18.
“However, we understand that the group could still secure additional change orders this year form the finalisation of past contracts SK316, Bergading and Baronia, potentially cushioning bottom-line impact of the lower revenue recognition in 1HFY18.
“In addition to its order book backlog of RM1.3 billion as at 31 Dec 2017, MMHE is tendering for RM4 billion worth of jobs, of which 80 per cent stems from local projects,” said the bank in a company report.
On the flipside, it is understood that the MMHE-Technip JV is the front-runner for the Rm2.2 billion Pegaga CPP which is set to be deployed in the block SK210 off Sarawak.
“As the operator Mubadala Petroleum is expected to reach final investment decision soon, the award could materialise in 2QFY18.
“Together with improved crude oil prices, which mitigate additional impairment concerns, we view that our earlier 50 per cent valuation discount on book value as overly conservative,” guided Kenanga Research.
In light of MMHE’s surprising results this quarter, both analysts have decided to take a more optimistic stance on MMHE’s prospects.
Kenanga Research increases their FY18 estimated earnings by 40 per cent to RM30.6 million and introduces a FY19 earnings estimate of RM4.2 million that assumed a RM500 million order-book replenishment and a 10 per cent growth in marine revenue.
Meanwhile, AmInvestment bank is raising their margin and positive tax charge assumptions that reversed FY18F loss of RM23mil to a net profit of RM12 million, and raised FY19F net profit by 2.7x to RM43 million.
Kenanga Research upgrades its call on the stock to ‘market Perform’ with an unchanged target price of RM0.820 while AmInvestment Bank upgrades it call to ‘Buy’ with a higher fair value of RM1.13 from RM0.78.
“The stock current trades at a compelling price book value of 0.5 fold given the receding risk of further impairments and significant operating losses, together with attractive dividend yields of 4 per cent,” shared the bank.