Results Highlights

• Mitrajaya’s 3Q2018 net profit sank 76.2% Y.o.Y to RM5.1 mln, dragged down by lower contribution across all its business segments. Revenue for the quarter declined 31.8% Y.o.Y to RM204.0 mln.

• For 9M2018, cumulative net profit contracted 45.3% Y.o.Y to RM34.6 mln. Revenue for the period slipped 24.5% Y.o.Y to RM675.8 mln. The reported earnings came below our expectations, amounting to only 54.7% of our previous 2018 net profit forecast of RM63.2 mln, while revenue for the period also came below our expectations, accounting to 65.6% of our RM1.03 bln forecast. The difference in both the top and bottomline is due to lower contribution across all its business segments, coupled with margins compression on the construction segment.

• Segmentally, the group’s 3Q2018 construction pretax profit slumped 91.4% Y.o.Y to RM0.8 mln on slower work progress of certain construction projects, while certain projects are at the tail-end of their construction stage. The property development segment’s pretax profit declined 40.8% Y.o.Y to RM8.1 mln, amid the sluggish property market condition. The South Africa property development segment reported pretax loss of RM81,000 mln vs. a pretax profit of RM3.1 mln in the previous corresponding quarter as all completed units were sold in 2017.

• As of 3Q2018, Mitrajaya’s net gearing stood at 0.4x (unchanged from 2Q2018). No dividends were declared under the quarter review as the group historically declares dividends in the final quarter of financial year end.

Prospects

After a somewhat quiet period for Mitrajaya in 2Q2018, the group has secured only one major construction contract in 3Q2018, valued at RM99.9 mln. With the inclusion of the aforementioned contract, Mitrajaya’s construction orderbook year-to-date (YTD) stood at RM203.0 mln, representing 67.7% of our orderbook replenishment assumption of RM300.0 mln for 2018 (see Appendix 1). Moving forward, its unbilled construction orderbook of approximately RM1.20 bln (orderbook-to-cover ratio of 1.2x to 2017’s construction revenue of RM994.2 mln) will provide earnings visibility over the next two years.

In view of the sluggish property market, we noted that Phase 3 of the Wangsa Residency development only managed to chalk in approximately 10% take-up rate since its soft launch in 1Q2018, whilst the 280 Park Homes take-up rate stood at below 50%. Moving forward, Mitrajaya’s unbilled sales of RM140.2 mln, mainly from Wangsa 9 Residency and Seri Akasia (affordable housing project), will provide earnings visibility over the next 2-3 years.

On the property development project in South Africa, there are no additional launches in the pipeline. Hence, we continue to expect minimal contribution from the aforementioned segment as all units were sold in 2017.

Valuation and Recommendation

We trimmed our earnings forecast for 2018 and 2019 by 28.0% and 30.9% to RM45.5 mln and RM43.8 mln respectively to account for the slower execution of construction works, margins compression in the construction segment and the sluggish property sales. Consequently, we downgrade Mitrajaya to a HOLD (from Buy) with a lower target price of RM0.35 (from RM0.50). We believe that its earnings are likely to be muted over subsequent quarters in view of the general slowdown in Malaysia’s construction sector.

Our target price is derived from a 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 0.6x (down from 0.8x) of their respective book values. The additional discount to its book value is to reflect the slowdown in the general property development market.

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 Nov 2018

Source: Mplus Research - 29 Nov 2018