Results Highlights 

• Mitrajaya's 3Q2017 net profit slipped 21.0% Y.o.Y to RM21.2 mln, dragged down by  a provision for cost overrun for the RAPID project, coupled with rising material and  labour cost that resulted in the erosion of construction margins. Revenue for the  quarter, however, gained 18.9% Y.o.Y to RM299.0 mln. 
• For 9M2017, cumulative net profit declined 15.7% Y.o.Y to RM63.2 mln. Revenue  for the period, however, improved 29.2% Y.o.Y to RM894.9 mln. The reported  earnings only amounted to 67.1% of our previous 2017 net profit forecast of  RM94.2 mln, while revenue for the period came within our expectations, accounting  to 77.5% of our RM1.15 bin forecast. 
• Segmentally, the group’s 3Q2017 construction segment pretax profit sank 64.3% Y.o.Y to RM9.8 mln on additional cost incurred for safety and working procedure compliance on the RAPID project. The property development segment’s pretax profit, however, surged 13.6x Y.o.Y to RM13.6 mln on higher billings from the Wangsa 9 Residency project that is at the advanced stages of construction, coupled with the final payment from a one-off compensation sum for land disposal in Johor. For the South Africa property development segment, its pretax profit slipped 20.6% Y.o.Y to RM3.1 mln on lower profit margin from the sales of land and buildings.

Prospects

Mitrajaya has secured two major contracts in 3Q2017, collectively worth RM466.0 mln. This brings its construction orderbook replenishment to RM1.13 bln YTD (see Appendix 1) – and amounting to 93.9% of our orderbook replenishment target of RM1.20 bln for 2017. With its sizable unbilled construction orderbook of RM1.69 bln – translating to an orderbook-to-cover ratio of 2.0x to 2016 construction earnings of RM843.5 mln, the aforementioned segment will provide earnings visibility over the next three years.

On the flipside, we expect losses from the RAPID project with the additional compliance with safety measures to erode its construction segment pretax margins to 5.0%-7.0% in 2017 and 2018 (down from 12.0%-13.0% in 2015 & 2016).

The group’s unbilled sales of RM200.9 mln from the Wangsa 9 Residency and Puchong Prima affordable housing project will sustain its property earnings over the next 2-3 years. After registering approximately 50% take-up rate in its Phase 2 of the Wangsa Residency project, we note that Phase 3, that carries a gross development value of RM300.0 mln, was launched in November 2017. The South Africa property project is already near its tail-end with estimated unbilled sales of RM5.1 mln that will be recognised progressively in the remainder of 2017.

We expect the group to complete its cash call exercise that entails a rights issue involving one rights share-for-every five existing Mitrajaya shares with free detachable warrants in 1H2018. Although the aforementioned exercise could lighten its balance sheet and improve its cash flow for its construction projects execution, there will be a dilutive impact on its share issued.

Valuation and Recommendation

With the reported earnings coming below our expectations, we slashed our earnings forecast for 2017 and 2018 by 12.2% and 22.0% to RM82.7 mln and RM75.8 mln respectively to account for the additional construction cost. We, however, maintain our BUY recommendation on Mitrajaya with a lower target price of RM0.95 (from RM1.20).

Our target price was derived from sum-of-parts valuation as we ascribed a target PER of 13.0x to its 2018 (fully diluted) construction earnings, while its local and overseas property development units are valued at an unchanged 0.8x their respective book values.

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 - 29 Nov 2017