ANALYSTS are mixed on Malaysia Marine & Heavy Engineering Holdings Bhd (MHB) following its record of profit in 4QFY19 after seven consecutive quarterly losses.
Affin Hwang Capital has upgraded MHB to a hold (from sell) on valuation grounds as the share price has fallen by 14% over the past three months. However, the research house has lowered its target price slightly to 82 sen (from 83 sen) as it has switched its valuation method.
Affin Hwang said: “MHB’s 4Q19 results beat expectations, with core net profit soaring to RM12.8 mil (3Q19: RM0.9 mil) mainly contributed by a RM20 mil variation order claim and a RM6 mil Inland Revenue Board (IRB) tax refund. The 2019 EBITDA swung back to the black while operating cash flow jumped 92% year-on-year. No dividend was declared, for the second year.”
The core loss for 2019 narrowed 75% year-on-year to RM29 mil (2018: -RM115 mil) as revenue increased by 4%, accompanied by a 5% decline in operating cost and a RM6 mil tax refund during the year.
Revenue-wise, 2019 growth was supported by a better marine segment performance with more dry dock and conversion work for LNG carriers, offsetting the heavy engineering segment’s decline as earlier projects had reached their end and new projects were still at their early stages.
In the meantime, MIDF Research has maintained its neutral recommendation on MHB with a revised target price of 72 sen.
While it noted that MHB returned to profit in 4QFY19 after seven consecutive quarterly losses, it remained conservative on the company’s earnings prospects given that its current project has reached the tail-end and its newly secured projects are still in infancy. This, it opined, will continue to compress the margin for the heavy engineering segment in the near term.
MIDF Research said: ”We opine that the revised target price is fair given that we are expecting MHB’s business to stage gradual recovery from 2HFY20 with better revenue recognition from projects expected to be completed from 2QFY20, higher revenue recognition from its Bokor CPP project and more dry docking and fabrication activities once its Dry Dock 3 (DD3) comes onboard in 3QFY20.”
MHB had returned to black with a profit of RM9.4 mil in 4QFY19, with earnings mainly driven by its marine segment arising from the improved margin from conversion works.
The heavy engineering segment, however, remains in a loss-making position arising from high unabsorbed overhead costs.
Meanwhile, the highly anticipated Kasawari Gas Development project has finally gone through its first steel cut back in December and it is expected to commence its first construction in March. That said, since the project is back-end loaded, the revenue recognition would not be significant in the coming two years.
“We also note that there are several projects that are expected to be completed from 2QFY20 which we opine will assist to cushion earnings whilst waiting for more significant revenue recognition to come from the Bokor and Kasawari projects.
“Furthermore, with the expected completion of DD3 in 3QFY20, we anticipate more marine repair works and conversions to take place as DD3 will be able to relieve the bottleneck currently experienced by DD1. Additionally, this would also allow MHB to take in more LNG carriers than before,” said MIDF.
“We are revising down our FY20 earnings expectations to RM49.5 mil (from RM86.5 mil) in view of the gradual recovery of its heavy engineering segment and compressed margin.” – Feb 13, 2020
