Investment Highlights

• We maintain UNDERWEIGHT on MRCB with a lower fair value of RM0.58 (from RM0.60) based on SOP valuations (Exhibit 2). We cut our FY20–FY21 earnings forecasts by 21% and 16% respectively to reflect the timing of revenue recognition in: (i) property development; and (ii) engineering, construction & environment divisions. We introduce FY22 net earnings forecast at RM72.3mil.

• MRCB’s FY19 net profit of RM23.7mil (-76.2% YoY) came in within our expectation but above consensus. Revenue fell by 29.5% YoY mainly due to lower contribution from the property development & investment, and engineering, and construction & environment divisions. The company’s highrise residential development projects are still in the early phase of construction, hence the lower revenue recognition. Management indicated stronger contributions from these projects beginning 2QFY20. The retiming of income recognition from the LRT3 project also impacted its revenue.

• The property development & investment division’s FY19 revenue and EBIT dropped by 45.6% and 21.5% YoY to RM566.7mil and RM76.8mil respectively due to the abovementioned reason. MRCB registered new sales of RM537mil (YoY-RM496.6mil) while unbilled sales of RM1.6bil shall provide better earnings visibility the medium term. MRCB is targeting new sales of RM550mil for FY20.

• The engineering, construction & environment division’s FY19 revenue and EBIT dipped by 10.4% and 59.0% YoY to RM679.5mil and RM23.1mil respectively. The sharp drop 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 a lower PBT of RM0.6mil, vs. RM14.6mil YoY due to a deferment of progress billings. The engineering, construction & environment division has open tenders worth RM1.4bil while its remaining order book stands at RM20.7bil.

• We believe earnings shall improve after 2HFY20, with the completion and handover of several property development projects as the pace of construction progress starts to pick up in 2020. Nonetheless, we remain prudent in our revenue assumption while revising our FY20–21 net earnings forecasts downwards by 21 and 16% respectively.

• Our UNDERWEIGHT call 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 - 27 Feb 2020