Malaysian Marine & Heavy Engineering 3QFY23 results were way below yearly expectations says MIDF, the house maintains its NEUTRAL call for MMHE, as it said it noted that the reported loss was from the prolonged provision cost incurred by MMHE for ongoing Heavy Engineering projects. Additionally, the weakening MYR against USD had also affected the pricing of materials and services in its operations.
The house believes the writeback for these projects would be present, as earnings had improved on a quarterly basis by nearly 3-fold. Nevertheless, to adjustments its revenue projection were mitigated by the lower earnings in 3QFY23.
MMHE’s 3QFY23 revenue gained +56%yoy to RM638.5m from higher revenue in its Heavy Engineering segment, earnings lost however reached nearly 8- fold to a deficit of -RM105.2m against a profit of RM15.7m in 3QFY22. This is mainly due to additional cost provisions for ongoing Heavy Engineering projects recognised in 2QFY23. Additionally, the weakening of MYR against USD had impacted the hedging of receivables for a project.
Heavy Engineering’s revenue rose by +78.1% to RM570.2m, but due to the additional cost provisions, it posted a deficit of -RM107.7m. Higher revenue was contributed by new and ongoing projects. Meanwhile, losses were due to price escalation impact and revised schedules on ongoing projects. The revised schedule has caused the extension of delivery dates of the ongoing projects, which was necessary to cater for the delayed onshore works.
Marine revenue dropped -23.5%yoy to RM68.2m, while earnings were down by -74.2%yoy to RM4.4m. Lower revenue was due to lower number of vessels secured, which consequently contributed to the lower earnings. Lower earnings were also due to the doubtful debts being recovered in 3QFY23.
Risk mitigation is underway but cyclical challenges remain. Nevertheless, MIDF believes MMHE will continue to mitigate
the risks of supply chain disruptions, and negotiate ways to reduce its cost provisions for its ongoing projects until the end
of its financial year. At the same time, the house also acknowledges the risk of inflation on raw material prices, as well as the one-off challenge from the upcoming winter season on the group’s shipyard activities.
In consideration of MMHE’s lower-than-expected earnings for 3QFY23 despite the high revenue, the house has revised its earnings estimates to mirror the current projection. It also considers the lower profit margin for its Marine segment in 3QFY23 by -13%, which is expected to prolong until the winter season, as well as the continuous losses in the Heavy Engineering segment in the forecast.
