KUALA LUMPUR: UOB Kay Hian Malaysia Research is retaining its Hold call for Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) as it lowered the target price from 40 sen to 37 sen.
It said on Friday it had retained its 0.3 times price-to-book value (P/B) valuation, which is below its current three-year average and at a discount to peers like Samsung Heavy industries (0.7 times), Hyundai Engineering (0.6 times) and Sembcorp (1.1 times).
“We roll forward valuations to 2021 but target price is reduced in tandem with post-impairment equity, ” it said.
MMHE had enjoyed peak valuations in end-19 due to the prospects of Kasawari and further platform job wins.
UOB Kay Hian Research said however, its fundamental recovery will highly depend on whether the recurring marine repair segment can prove its execution to sustain profits, which had consistently disappointed.
“We remain concerned on its orderbook replenishments after the sizable Bokor and Kasawari jobs. Nevertheless, risk-reward is priced in; we advise taking profit on strength and look at a lower entry level of 33 sen, ” it said.
Commenting on the 1H results, it said the losses were below its expectations, even though it was the sole research house forecasting a loss of RM16mil previously.
The 1H20 core loss excluded a total impairment of RM312.7mil, and 50% of COVID-19 cost provision of RM90mil.
Offshore (fabrication) losses widened quarter-on-quarter (QoQ). This was on lower revenues and high opex, in tandem with lower yard utilisation.
UOB Kay Hian Research said MMHE executed maintenance for only 18 vessels in 1H20 (1Q20: 15), as this segment was heavily impacted by yard suspension and border restrictions, which prevented movement of vessels and foreign specialists.
Cash remained stable at RM641mil (40 sen a share) even though 1H20 EBITDA fell to a loss of RM48.7mil (1H19: RM8.5mil loss), thanks to a gain in payables of RM65mil YTD, however there was inadequate guidance on payables’ sustainability.
Capex was at RM83.5mil (1Q20: RM62mil) for DD3 (94% completion, up QoQ from 92%).
MMHE’s orderbook decreased QoQ from RM2.7bil to RM2.6bil. As there was no new order intake, MMHE continued to recognise revenues in the offshore division, especially from the RM1bil Bokor CPP EPCC (77.5% completion vs 76.9% QoQ, target may be delayed from 3Q20) and RM2.2bil Kasawari EPCC (16.6% completion vs 10.5% QoQ).
“Due to the yard suspension since March 18, and the yard was only allowed to operate at limited capacity from April 16, Bokor was roughly 10% behind schedule.
“On marine repair, vessels were not allowed to move due to border restrictions/ quarantine measures. There were also restrictions of foreign specialists and equipment entering Malaysia to complete the marine projects.
“MMHE lost eight marine projects (four to five LNG) during the MCO period, but expects to get back on track by August. Right now, the yard utilisation has recovered to 70% levels, but are unlikely to ramp up to >90% at the level back in 1Q20, with staff under a rotational basis (50%), ” it said.
UOB Kay Hian Research widened its 2020-22F loss forecasts by 365%/77%/110%. This comes after assuming some revenue deferment for offshore due to longer project completion timelines.
“Although we assume 2H20 to be better vs 1H20, we still cut margins, assuming some additional costs are not reimbursable.
“We sharply lower marine revenue forecasts for 2020-21 by assuming lesser normal vessel maintenance works, and the likelihood of MMHE securing new conversion works (the high-margin job for marine repair) is getting slimmer with the Limbayong bid being delayed again, ” it said.
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