Malaysia Marine & Heavy Engineering’s 2Q23 results came in below expectations due to unexpected cost provisions from delays in project execution.
“We do not expect such lumpy cost provisions to recur, and therefore, see a stronger earnings recovery ahead, supported by its RM6.2bn orderbook,” said RHB Research (RHB) in the recent Malaysia Results Review Report.
RHB also suggests a Target Price of RM0.60 and maintains the Buy rating. MMHE recorded a 2Q23 core net loss of RM385.5m against RHB and consensus’ full-year estimates of RM38m and RM68m profit. RHB now projects a net loss, and does not expect a dividend payout this year.
Revenue surged by 2.1x QoQ to RM1.1bn due to higher project billings from the heavy engineering (HE) division. However, the segment saw an operating loss of RM390m due to lumpy cost provisions, resulting from the revised schedule for its ongoing projects.
“The marine division’s operating profit for the quarter also declined to RM3.3m on lower revenue and diminishing margins. MMHE remains in a net cash position of RM89.3m as of 2Q23,” said RHB.
The cost provisions came from the decision to defer the load-out of certain projects in order to do additional works onshore instead of offshore as it is more costly.
Prior to fabrication load-out, MMHE is unable to claim any milestone payments from its clients, and hence needs to incur the cost. Management is not expecting any more provisions and is looking to recover the costs in the upcoming quarters.
“We believe the cost recovery, as well as the coming quarters’ profits from the HE segment will partially offset 2Q23’s losses,” said RHB.
MMHE’s orderbook as of 2Q23 stands at RM6.2bn, after recognising some orders for the quarter. Its tenderbook is worth RM5-6bn as the group has converted a few jobs into its orderbook. It is currently running at 80-90% capacity, and hence, will be selective with new jobs, looking for projects with reasonable profit margins.
On the marine side, management guided that earnings will remain subdued for the next quarter before picking up in 4Q23. Current utilisation for dry dock (DD) 1, DD2, are DD3 are at 72%, 91% and 65%. RHB remains optimistic on MMHE as they do not see further lumpy cost provisions.
