Results Highlights

• Mitrajaya’s 1Q2018 net profit slipped 33.2% Y.o.Y to RM19.2 mln, dragged down by lower contribution from the construction segment arising from a provision for cost overrun on the RAPID project and lower property sales in both the local market and in South Africa. Revenue for the quarter declined 9.0% Y.o.Y to RM265.1 mln.

• The reported earnings came slightly below our expectations, amounting to 23.5% of our 2018 net profit forecast of RM81.7 mln, while revenue for the quarter also came slightly below our expectations, accounting to 23.2% of our earlier RM1.14 bln forecast. The difference in its reported earnings is mainly due to lower contribution from the construction segment.

• Segmentally, the group’s 1Q2018 construction segment pretax profit contracted 51.9% Y.o.Y to RM9.5 mln on additional cost incurred for safety and working procedure compliance on the RAPID project. The property development segment’s pretax profit fell 10.1% Y.o.Y to RM13.5 mln on slower topline growth. For the South Africa property development segment, its pretax profit sank 75.3% Y.o.Y to just RM0.4 mln as all the completed bungalow units were fully sold at end-2017.

• As of 1Q2018, Mitrajaya’s net gearing rose to 0.5x (from 0.4x recorded in 4Q2017). Moving forward, the group aims to pare down its borrowing via the utilisation of the proceeds (RM79.6 mln) raise from the recent completion of the RM81.3 mln rights issue exercise.

Prospects

We note that Mitrajaya has secured its first construction project for the year back in January 2018 for the construction of 1Malaysia Civil Servants Housing Project (PPA1M) job from Putrajaya Home Sdn Bhd valued at RM103.1 mln. This brings its unbilled construction orderbook to RM1.47 bln – implying an orderbook-to-cover ratio of 1.5x to 2017’s construction revenue of RM994.2 mln that will provide earnings visibility over the next 2-3 years.

With the loss-making RAPID project (additional costs incurred for compliance to the stringent construction requirements imposed by PETRONAS on the Pengerang Integrated Complex project) coming to a tail end by 1H2018, we expect its construction EBITDA margins to recover towards the 10.0%-12.0% level. Moving forward, the group’s orderbook replenishment is expected to decline to around RM500.0 mln for both 2018 and 2019 (previously RM700.0 mln for both 2018 and 2018) from its tenderbook of some RM2.00 bln due to potential delays in contract award and downsizing of future construction contract values (see Appendix 1) as the new government reviews the viability of planned infrastructures.

Meanwhile, the Puchong Prima affordable housing scheme has achieved a positive response, securing a full take up rate since launching in 2017. We note that the group has recently launched Block A of Wangsa 9 with an estimated GDV of RM300.0 mln and 24 units of shophouses in Johor with a GDV of RM18.0 mln. Moving forward the group’s property development unbilled sales of RM165.1 mln will provide earnings visibility over the next 2-3 years.

With all completed bungalow lots fully sold in 2017, we expect a minimal contribution from the property development activities in South Africa segment, except from 18 units of bungalow units that are expected to complete construction in 3Q2018.

Valuation and Recommendation

We trimmed our earnings forecast for 2018 and 2019 by 3.4% and 2.3% to RM78.9 mln and RM79.9 mln respectively to account for the lower construction orderbook replenishment prospects amid the new government’s impending austerity drive. Consequently, we downgrade Mitrajaya to a HOLD (from BUY) recommendation with a lower target price of RM0.54 (from RM0.75).

Our target price was derived from sum-of-parts valuation as we ascribed a lower target PER of 8.0x (from 11.0x) to its fully diluted 2018 fully diluted construction earnings, while its local and overseas property development units are valued at an unchanged 0.8x their respective book values. The lower target PER for its construction unit is in line with the lower sector average after the sector’s outlook dimmed with the new government’s move to review most of the planned mega infrastructure projects.

Source: Mplus Research - 31 May 2018