Results Highlights

• Mitrajaya’s 2Q2018 net profit fell 21.8% Y.o.Y to RM10.3 mln, dragged down by lower contribution from the construction segment as several projects are at the initial stage of construction. Revenue for the quarter declined 32.1% Y.o.Y to RM206.8 mln.

• For 1H2018, cumulative net profit decreased 29.6% Y.o.Y to RM29.5 mln. Revenue for the period dipped 20.8% Y.o.Y to RM471.8 mln. The reported earnings came below our expectations, amounting to 37.7% of our previous 2018 net profit forecast of RM78.4 mln, while revenue for the period came slightly below our expectations, accounting to 46.6% of our RM1.10 bln forecast. The difference in its reported earnings is due to lower contribution from the construction segment.

• Segmentally, the group’s 2Q2018 construction segment pretax profit slumped 63.4% Y.o.Y to RM0.8 mln on slower work progress of certain construction projects that were secured in 2017. The property development segment’s pretax profit, however, jumped 90.0% Y.o.Y to RM13.8 mln, mainly due to a one-off compulsory land acquisition in Johor. The South Africa property development segment reported pretax loss of RM0.2 mln vs. a pretax profit of RM2.3 mln in the previous corresponding quarter as all completed units were sold in 2017.

• As of 2Q2018, Mitrajaya’s net gearing fell to 0.4x (from 0.5x in 1Q2018). 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

It was a muted 2Q2018 for Mitrajaya in the absence of new major construction contracts secured. By that, its single major construction contract secured back in 1Q2018 is valued at RM103.1 mln and makes up to only 34.4% of our orderbook replenishment assumption of RM300.0 mln for 2018 (see Appendix 1). Moving forward, its unbilled construction orderbook of approximately RM1.30 bln (orderbook-to-cover ratio of 1.3x to 2017’s construction revenue of RM994.2 mln) will provide earnings visibility over the next two years. In the meantime, the group is tendering for RM3.00 bln worth of construction projects, comprising of RM2.90 bln for building works, while the remainder (RM100.0 mln) is for infrastructure projects.

We noted that the 280 Park Homes development that was launched in 2012 (Phase 1) and 2014 (Phase 2) respectively achieved a 41% take-up rate as of 1H2018, while the sluggish local property market saw a mere 5.0% take-up rate in Block A Wangsa 9 Residency since its soft launch in February 2018. Moving forward, Mitrajaya’s unbilled sales of RM156.1 mln, mainly from Wangsa 9 Residency project, will provide earnings visibility over the next 2-3 years.

On the property development project in South Africa, construction of the 18 units of bungalow units are expected to completed in 3Q2018 with billings to pick up only towards end-2018. Hence, we expect minimal contribution from the aforementioned segment.

Valuation and Recommendation

We trimmed our earnings forecast for 2018 and 2019 by 19.9% and 20.7% to RM63.2 mln and RM63.3 mln respectively to account for the slower execution of construction works coupled with the compressing construction margins amid the increasing overhead cost. We maintain HOLD recommendation on Mitrajaya, but with a lower target price of RM0.50 (from RM0.54). We believe that earnings are likely to be muted over subsequent quarters in view of the general slowdown in Malaysia’s construction sector.

Our target price was derived from sum-of-parts valuation as we ascribed a target PER of 8.0x (unchanged) to its fully diluted 2019 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 impact the general property market and the sale of its properties.  

Source: Mplus Research - 29 Aug 2018