UOB Kay Hian: Lower profits for MMHE for 2017-19 amid further impairment risk

PETALING JAYA: UOB Kay Hian is slashing Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) 2017-19 net profit forecast by 40%, 35% and 29% respectively while not ruling out further impairment risk.

The research house on Monday said it was maintaining the oil and gas fabricator’s orderbook replenishment assumption of RM0.5bil for small contracts but now expect a further delay in earnings recognition for one large contract win per year. 

However, it noted that it was maintaining the marine earnings before interest and tax (EBIT) forecasts of more than RM55mil annually are retained. 

“Although the investment tax allowance is until Sept 19 for its yard optimisation, it is still difficult to ascertain the timing of lower tax rates at this juncture. 

“There are risks in the form of further cost overruns, and lower Pengerang/onshore contracts and marine repair, the brokerage noted. 
UOB Kay Hian expect MMHE’s marine repair division to continue to be busy with a more than 95% utilisation.                                             

“We expect this division to report higher quarter-on-quarter (q-o-q) EBIT from RM9mil in the first quarter of 2017 (Q1 17) (Q1 is a seasonally low quarter) on higher number of vessel repairs, and recognise higher conversion work, given that the FSO Nautica Bergading had its sailaway in early-June (according to Upstream) to Hess and EA Technique.

“Historically, marine repair recorded EBIT of RM15mil-20mil per quarter. We maintain our conservative EBIT forecast of more than RM55mil for 2017, assuming slightly lower conversion projects, mostly for LNG vessels,” it added.

The research house, which is maintaining its hold call on the stock with a target price of RM0.82, said although the offshore business unit (OBU)      division has a track record of unpredictable losses especially during periods of declining orderbooks, it believe the trend of consensus earnings downgrades is at the tail-end. 

This is because it MMHE will resume its ability to lower costs and narrow the losses from OBU as most of its manpower are contract staff, lower depreciation after several rounds of impairments, and minimal capex/financing cash outflows, the larger and recurring marine repair contribution will anchor 2017-18 profits, and consensus earnings did not account for all non-recurring items. 

Save for unrealised forex gains, UOB kay Hian  said the company does not normally disclose realised forex gains/losses in the quarterly statements. If the realised forex loss of RM44mil in 2016 (2015: RM19mil loss) were to be excluded, MMHE in fact remained in core profit in 2016, instead of break even, it said.