Investment Highlights

• We maintain our UNDERWEIGHT recommendation on MRCB with a lower fair value of RM0.65 (from RM0.77) based on SOP valuation (Exhibit 2). We cut our FY19–FY21 earnings forecasts by 35%, 16% and 8% respectively to reflect the timing of revenue recognition in both the property development, and engineering, construction & environment divisions.

• MRCB’s 1HFY19 net profit of RM15.0mil (-72.5% YoY) came in below our and market expectations, at 16.3% of our and 15.8% of consensus full-year estimates.

• Revenue fell by 43% YoY mainly due to lower revenue contribution from both the property development & investment and engineering and construction & environment divisions.

• MRCB’s 1HFY19 PBT plunged by 75.2% to RM18.2mil, impacted by the lower revenue recognised during the period as well as the deferment and retiming of income recognition from the LRT3 project.

• The property development & investment division’s 1HFY19 revenue and EBIT dropped by 62% and 15% YoY respectively. MRCB registered new sales of RM244mil while unbilled sales of RM1.8bil shall provide better earnings visibility the medium term.

• The engineering, construction & environment division’s 1HFY19 revenue and EBIT tumbled by 26% and 96% YoY respectively. The division suffered a loss of RM15.2mil in 2QFY19 due to lower revenue and costs incurred while awaiting the completion of the final accounts of completed projects. The engineering, construction & environment division currently has open tenders valued at RM1.6bil while its remaining order book now stands at RM21.2bil.

• Management expects stronger earnings in 2HFY19, with higher revenue recognitions. Nonetheless, most projects are still in early stages, hence we believe the company may not be able to match previous year’s earnings level. As a result, we reduce our FY19–21 earnings forecasts by 35%, 16% and 8% respectively.

• Our UNDERWEIGHT recommendation is due to: 1) a limited upside to 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 - 27 Aug 2019