Results Highlights

• Mitrajaya Holding Bhd’s 1Q2017 net profit rose 55.5% Y.o.Y to RM28.7 mln on the back of a 49.0% Y.o.Y jump in revenue to RM291.4 mln. The significant jump in both its revenue was contributed by its construction division that registered a 48.8% surge in revenue to RM245.8 mln on higher recognition of its ongoing projects, while its earnings was boosted by the compensation sum amounting to RM10.9 mln from the compulsory acquisition of its land in Pengerang, Johor.

• While Mitrajaya’s revenue amounted to 29.3% of our 2017 forecast, we view it as broadly within expectations on an accelerated pace of construction that is likely to normalise later in the year. Excluding the contribution from the compulsory land acquisition, however, its earnings would be below expectations with its pretax profit only amounted to RM27.7 mln, which is 18.9% of our 2017 forecast as its construction pretax margin thinned slightly to 8.0%, from 9.1% previously, while the normalised earnings from its property development segment was more subdued during the quarter.

• Its South African property development project also posted lower earnings contribution (1Q2017 pretax profit of RM1.7 mln, vs. RM2.7 mln in 1Q2016) as the bulk of its earnings from its recent launches have already been recognised, with minimal amounts left to be recognised in the remainder of 2017.

Prospects

Mitrajaya’s prospects remain firm with its strong orderbook of RM1.73 that will keep it busy for the next three years. Already the group has secured two new projects collectively valued at RM433.8 mln YTD, which is more than half our orderbook replenishment target of RM800 mln for 2017. With the construction sector outlook remaining sanguine as the government’s ramps up the country’s infrastructure development, we expect the orderbook replenishment target to be met.

Meanwhile, we expect the group’s recognition of its ongoing projects to normalise later in the year after it was slightly ahead of expectations in 1Q2017, but we expect margins, which averaged 8.0% in 1Q2017 (vs. 9.1% in 1Q2016), to remain pressured by higher cost. Still, the slightly tighter margins are no cause for concern given that the cost escalations are likely to remain benign.

After slower progress recognition in 1Q2017, we expect its property recognition to accelerate in the later parts of the year when construction of the Wangsa 9 Residency project reaches advance stages. We estimate that there is still some RM130 mln – RM140 mln worth of unbilled sales and the project will continue to provide earnings visibility over the next 2-3 years, albeit demand may still be subdued. Meanwhile, the South Africa property project is already near its tail-end with estimated unbilled sales of about RM7.0 mln that will be recognised progressively in the remainder of 2017.

Valuation and Recommendation

We make no change to our full year forecast as we expect its earnings to catch up in the subsequent quarters when the progress recognition on its property development business picks-up. There is also no change to our 2018 forecast and we maintain our BUY recommendation on Mitrajaya with an unchanged target price of RM1.95. We continue to like Mitrajaya for its strong construction orderbook that will ensure sustained earnings growth over the next two years. Furthermore, we are also sanguine on its orderbook replenishment prospects given its strong delivery track record.

We ascribed an unchanged target PER of 11.0x to its 2017 (fully diluted) construction earnings, while the value of its local and overseas property development units, are valued at an unchanged 0.8x their respective book values. At the target price of RM1.95, Mitrajaya will be trading at prospective PERs of 10.6x and 9.3x in 2016 and 2017 respectively, near its industry peer averages.

Risks to our forecast and target price include the group failing to reach the orderbook replenishment target that could dent its future earnings and a spike in input cost affecting both its construction and property development margins. Further tightening of credit facilities from financial services providers will continue to negatively affect the general property market and the sale of its properties.

Source: Mplus Research - 30 May 2017