Comprehensive Analysis of Malaysia Marine and Heavy Engineering (MMHE)

Overview

Malaysia Marine and Heavy Engineering (MMHE), a Petronas-owned deepwater offshore oil and gas fabricator, continues to demonstrate its capability in Engineering, Procurement, Construction, and Commissioning (EPCC) scopes of work. With a significant upside potential, MMHE remains a compelling investment opportunity.

Company Performance and Key Metrics

MMHE’s stock is currently rated as a ‘BUY’ with a maintained target price of RM0.70, signifying a potential upside of 48.5% from its current share price of RM0.47. MMHE is categorized under the Energy sector, with a Bloomberg ticker of MMHE MK. The company has a market capitalization of RM752 million (approximately US\$171.7 million) and a 3-month average daily turnover of US\$0.2 million.

Recent Financial Results

In the third quarter of 2024 (3Q24), MMHE delivered a surprising profit performance, driven primarily by project cost claims and a rebound in its marine segment. Despite stiff competition from other regional yards, MMHE’s marine segment showed positive sequential growth.

3Q24 Financial Highlights

• Revenue: RM906.5 million (up 0.7% QoQ, up 42.0% YoY)
• EBIT: RM20.8 million (down 73.7% QoQ, down 120.7% YoY)
• Net Profit: RM15.3 million (down 79.3% QoQ, down 114.5% YoY)
• Operating Margin: 2.3%
• Marine Segment Revenue: RM106.5 million (up 17.6% QoQ, up 56.2% YoY)

Performance Analysis

MMHE’s 9M24 core profit exceeded expectations, reaching 123% of the firm’s and 102% of consensus forecasts. Excluding exceptional items such as a RM14 million unrealized forex loss, the 3Q24 EBITDA stood at RM48 million, showing a healthy performance despite being lower than the previous quarters.

Marine Segment Rebound

The marine segment completed repairs on 64 vessels, including 10 LNG ships, significantly outpacing the previous year’s performance. The higher proportion of LNG retrofits, which typically command higher margins, contributed to better revenue and profitability.

Order Book and Project Execution

MMHE’s order book was adjusted to RM5.4 billion from RM5.7 billion in the previous quarter. MMHE is actively bidding for RM7-8 billion worth of contracts, primarily focused on local oil and gas projects. The company has shown effective working capital management, with major projects like the Central Processing Platforms (CPPs) for Kasawari Phase 1 and Jerun being delivered on time.

Future Earnings Outlook

MMHE’s earnings for 2024-26 have been upgraded by 37%, 52%, and 28% respectively. The company’s continuous positive project close-outs and claims, along with steady execution, underpin this optimistic outlook. Additionally, MMHE’s marine segment is expected to benefit from diversification efforts to combat rising competition.

Valuation and Recommendation

MMHE is recommended as a ‘BUY’ with a target price of RM0.70, pegged to an unchanged 0.7x P/B on 2025 forecasts. The company’s P/B valuation remains attractive compared to peers, and its transformation story presents opportunities for sustainable profit recovery and ESG/decarbonization initiatives.

Environmental, Social, and Governance (ESG) Updates

Environmental Initiatives

• Carbon Emission Reduction: MMHE has adopted the greenhouse gas (GHG) protocol and installed an 8.3MWp solar panel, expected to generate RM30 million in savings over 21 years.
• Safety (HSE): The company reported a 0.13 LTI Frequency for Heavy Engineering Operations in 2022, with one fatality incident in 2023 due to scaffolding failure.

Social Initiatives

• Diversity: 18% female representation among employees.
• Salary Adjustment: RM200 salary adjustment for all employees in 2022 against the cost of living, totaling RM6 million.

Governance Initiatives

• Alignment with MISC’s ESG and Responsible Supply Chain program.

Project Progress

• Rosmari Marjoram: 95% completion (3Q24)
• Jerun: 99% completion (Delivered)
• Kasawari CCS: 53% completion (4Q25)
• CPOC: 72% completion (4Q24)
• Offshore Wind (TenneT): 3% completion (2028)

Receivables and Segmental Forecasts

MMHE’s receivables showed a mix of third-party and related-party trades, with significant amounts due from customers on contracts. The company’s segmental forecasts for 2024-2026 indicate a focus on both offshore and marine repair revenues, with expected operating profit margins improving over the years.

Receivables

• Trade (3rd party): RM150.4 million (3Q24)
• Trade (related party): RM160.2 million (3Q24)
• Trade (Amount due from customers on contracts): RM1234.49 million (3Q24)

Segmental Forecasts

• 2024F Revenue: RM2,815 million
• 2025F Revenue: RM3,020 million
• 2026F Revenue: RM2,620 million
• 2024F Operating Profit: RM78.9 million
• 2025F Operating Profit: RM42.5 million
• 2026F Operating Profit: RM71.4 million

Profit and Loss, Balance Sheet, and Cash Flow

MMHE’s financial statements for 2023-2026 provide insights into the company’s profitability, asset management, and cash flow dynamics. The company’s EBITDA margin, pre-tax margin, and net margin reflect its operational efficiency and growth prospects.

Profit and Loss

• 2023 Net Turnover: RM3,309 million
• 2024F Net Turnover: RM2,815 million
• 2025F Net Turnover: RM3,020 million
• 2026F Net Turnover: RM2,620 million
• 2023 EBITDA: -RM392 million
• 2024F EBITDA: RM154 million
• 2025F EBITDA: RM115 million
• 2026F EBITDA: RM142 million

Balance Sheet

• 2023 Total Assets: RM3,649 million
• 2024F Total Assets: RM2,925 million
• 2025F Total Assets: RM3,142 million
• 2026F Total Assets: RM3,062 million
• 2023 Shareholders’ Equity: RM1,267 million
• 2024F Shareholders’ Equity: RM1,462 million
• 2025F Shareholders’ Equity: RM1,573 million
• 2026F Shareholders’ Equity: RM1,613 million

Cash Flow

• 2023 Operating Cash Flow: -RM165 million
• 2024F Operating Cash Flow: -RM253 million
• 2025F Operating Cash Flow: RM191 million
• 2026F Operating Cash Flow: RM179 million
• 2023 Investing Cash Flow: -RM66 million
• 2024F Investing Cash Flow: RM90 million
• 2025F Investing Cash Flow: RM50 million
• 2026F Investing Cash Flow: -RM50 million

Conclusion

MMHE’s commitment to delivering positive earnings surprises, effective project execution, and strategic initiatives in ESG highlights its potential for future growth. Investors are encouraged to consider MMHE as a long-term investment opportunity, with strong financial metrics and a promising outlook.

Report by UOB Kay Hian, dated Thursday, 14 November 2024