Investment Highlights

• We maintain our UNDERWEIGHT recommendation on MRCB with a lower fair value of RM0.60 (from RM0.63) based on SOP valuations (Exhibit 2). We cut our FY19–FY21 earnings forecasts by 57%, 34% and 25% respectively to reflect the timing of revenue recognition in both the: (i) property development; and (ii) engineering, construction & environment divisions.

• MRCB’s 9MFY19 net profit of RM17.2mil (-76.8% YoY) came in below our and market expectations, at 29% and 28% fullyear estimates respectively.

• Revenue fell by 43% YoY mainly due to lower contribution from the property development & investment and engineering, and construction & environment divisions. Moreover, MRCB’s high-rise residential development projects are still in the early phase of construction, hence the lower revenue recognition. Meanwhile, the retiming of income recognition from the LRT3 project also impacted the group’s revenue.

• The property development & investment division’s 9MFY19 revenue and EBIT dropped by 58% and 21% YoY respectively. Nevertheless, MRCB registered new sales of RM398mil while unbilled sales of RM1.7bil shall provide better earnings visibility the medium term.

• The engineering, construction & environment division’s 9MFY19 revenue and EBIT tumbled by 25% and 93% YoY respectively. The significant drop in revenue and profit was mainly due to the cost incurred while awaiting the completion of the final accounts of completed projects. MRCB George Kent Sdn Bhd’s LRT3 project contributed lower PBT of RM1.2mil, as compared with RM20.7mil YoY as a result of deferment of progress billings. Meanwhile, the engineering, construction & environment division currently has open tenders valued at RM1.2bil. Its remaining order book now stands at RM20.9bil.

• We believe earnings shall improve after 2HFY20, with the completion and handover of several property development projects; with the pace of construction progress beginning to pick up in 2020. We reduce our FY19–21 earnings forecasts by 57%, 34% and 25% respectively and maintaining our UNDERWEIGHT call.

• 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 its share price while fundamentals persist; 2) surprises in earnings; and 3) major catalysts such as M&A and huge contract awards.

Source: AmInvest Research - 22 Nov 2019