Investment Highlights

• We downgrade MRCB to UNDERWEIGHT from HOLD recommendation with a lower fair value of RM0.77 (from RM0.83) based on SOP valuation (Exhibit 2). We cut our FY19–FY21 earnings by 29%, 31% and 27% respectively to reflect the timing in revenue recognition in the property development & investment and engineering, construction & environment divisions.

• MRCB’s 1QFY19 net profit of RM4.0mil (-81.6% YoY) is below our and market expectations, at 3% of both ours and consensus full-year estimates.

• Revenue dropped by 45% YoY mainly due to lower revenue contribution from both the property development & investment and engineering and construction & environment divisions as the construction of VIVO (9 Seputeh) and Kalista Park Homes (Bukit Rahman Putra) has been completed.

• MRCB’s 1QFY19 PBT plunged by 72.5% to RM8.4mil, impacted by the lower revenue recognised during the period as well as the deferment and retiming of income recognition from the LRT 3 project.

• The property development & investment division contributed 36% and 14% to the group’s 1QFY19 revenue and EBIT respectively. MRCB registered new sales of RM75mil while unbilled sales of RM1.6bil shall provide better earnings visibility the medium term.

• The engineering, construction & environment division contributed 57% and 67% to the group’s 1QFY19 revenue and EBIT respectively. Despite a 31% YoY decline in revenue, this division’s EBIT grew by 4%to RM16.7mil. The engineering, construction & environment division currently has open tenders valued at RM1.4bil while its remaining order book now stands at RM22.6bil, indicating a stable income over the next 2–3 years.

• Our UNDERWEIGHT recommendation downgrade is due to: 1) a limited upside on the share price; 2) a generally weak investor sentiment on the property/construction sector, particularly among larger developers; and 3) the still sluggish demand for local properties. We may upgrade the stock to a HOLD/BUY if: 1) there’s a sharp retracement in share prices while fundamentals persist; 2) surprises in earnings; and 3) major catalysts such as M&A and huge contract awards.

Source: AmInvest Research - 31 May 2019