Results Highlights

• Mitrajaya’s 4Q2018 net profit slipped 41.7% Y.o.Y to RM10.0 mln, dragged down by lower contribution across all its business segments. Revenue for the quarter decreased 39.6% Y.o.Y to RM162.6 mln.

• For 2018, cumulative net profit contracted 44.5% Y.o.Y to RM44.6 mln. Revenue for the year slipped 28.0% Y.o.Y to RM838.4 mln. The reported earnings came below our expectations, amounting to 92.8% of our 2018 net profit forecast of RM48.0 mln, while revenue for the period also came below our expectations, accounting to 87.5% of our RM958.5 mln forecast. The difference in both the top and bottomline is mainly due to lower contribution from the construction segment amid its depleting unbilled orderbook.

• Segmentally, the group’s 4Q2018 construction pretax profit sank 91.5% Y.o.Y to RM0.9 mln on slower topline contribution as a result of its depleting unbilled orderbook. The property development segment’s pretax profit declined 4.1% Y.o.Y to RM12.0 mln on higher operational cost. The South Africa property development segment’s pretax profit slumped 94.3% Y.o.Y to RM0.1 mln as all completed units were sold in 2017.

• As of 4Q2018, Mitrajaya’s net gearing stood at 0.4x (unchanged from 3Q2018). A first and final dividend of 1.5 sen per share was declared for the quarter.

Prospects

Mitrajaya has secured only one major construction contract, valued at RM99.9 mln, in 4Q2018 for the construction of seven-storey private hospital at Bukit Jalil. This brings its construction orderbook replenishment to RM203.0 mln for 2018, representing only 67.7% of our orderbook replenishment assumption of RM300.0 mln. (see Appendix 1). Moving forward, its unbilled construction orderbook of RM1.06 bln, implying an orderbook-to-cover ratio of 1.5x of 2018’s construction revenue of RM698.8 mln, will sustain the segment’s earnings over the next two years. In the meantime, we have imputed an orderbook replenishment assumption of RM300.0 mln for 2019 (down from RM500.0 mln) amid the slowdown in construction sector.

The sluggish property market will continue to cap the group’s property development segment’s earnings growth. Take-up rates for Phase 3 of Wangsa Residency development have been lackluster since its launch in 1Q2018. Moving forward, the group’s unbilled sales of RM134.4 mln, mainly from Wangsa 9 Residency and the affordable housing project – Seri Akasia, will see progressive contribution from 2H2018.

Elsewhere, Mitrajaya’s property development project in South Africa will see no new launches in 2019. With the recent completion of 18 units of bungalow houses, its current unbilled sales of RM7.9 mln will provide earnings visibility in 2019.

Valuation and Recommendation

We trimmed our earnings forecast for 2018 and 2019 by 2.2% and 4.5% to RM47.0 mln and RM32.9 mln respectively to account for the slower execution of construction works, margins compression in the construction segment and the sluggish property sales. Consequently, we maintain our HOLD recommendation on Mitrajaya, but with a lower target price of RM0.34 (from RM0.35). We believe that its earnings are likely to be muted over the 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 - 28 Feb 2019