Results Highlights

• Mitrajaya’s 1Q2019 net loss stood at RM4.3 mln vs. a net profit of RM19.2 mln recorded in the previous corresponding quarter, dragged down by lower contribution in the construction and property development segment. Revenue for the quarter decreased 30.0% Y.o.Y to RM185.6 mln.

• The reported earnings came below our expectations as we expected Mitrajaya to chalk-in net profit of RM34.9 mln in 2019, while revenue came slightly below our expectations, accounting to 23.7% of our RM783.1 mln forecast. The difference in the bottomline is mainly due to lower-than-expected contribution from the construction segment amid its depleting unbilled orderbook.

• Segmentally, the group’s 1Q2019 construction pretax loss stood at RM11.0 mln vs. a pretax profit of RM9.5 mln recorded in 1Q2018, in view of the lower billings from the slowdown of its orderbook replenishment in 2018. The property development segment’s pretax profit sank 42.2% Y.o.Y to RM7.8 mln on higher operational cost, coupled with the sluggish sales. The South Africa property development segment’s pretax loss stood at RM109,000 vs. a pretax profit of RM423,000 due to reduction in golf operation revenue and increase in operating cost for golf course and clubhouse maintenance.

• As of 1Q2019, Mitrajaya’s net gearing stood at 0.4x (unchanged from 4Q2018).

Prospects

Amid the subdued construction industry, we note that Mitrajaya did not secure any major construction contracts in 1Q2019. Moving forward, its unbilled construction orderbook of RM936.0 mln, implying an orderbook-to-cover ratio of 1.3x of 2018’s construction revenue of RM698.8 mln, will sustain the segment’s earnings over the next one-and-a half years. In the meantime, we have imputed an orderbook replenishment assumption of RM300.0 mln for 2019 (see Appendix 1).

The sale of additional land for the RAPID Pengerang project amounting to RM13.3 mln was completed and payment was received, whilst there remains an outstanding payment for late interest awarded by the High Court amounting to approximately RM1.1 mln that is expected to be received in 2Q2019. Moving forward, the group’s unbilled sales of RM110.1 mln, mainly from Wangsa 9 Residency and the affordable housing project – Seri Akasia, will see progressive contribution from 2H2019.

On its property development project in South Africa, we expect to see minimal contribution from the four unsold bungalow units valued at RM4.1 mln that was completed in November 2018, coupled with rental income from the Blue Valley Shopping Mall. Moving forward, Mitrajaya has commenced construction of 3-storey walk up high-end apartments in August 2018 which is expected to complete in early 2020. The aforementioned project comprises of 42 units of apartments and carries an estimated GDV of RM15.0 mln.

Valuation and Recommendation

With the reported earnings coming below our estimates, we slashed our earnings forecast for 2019 and 2020 by 66.2% and 50.7% to RM15.9 mln and RM16.2 mln respectively to account for the lower execution of construction works, margins compression in the construction segment and sluggish property sales. Consequently, we downgrade our recommendation on Mitrajaya to SELL (from Hold), with a lower target price of RM0.30 (from RM0.34). We believe that its earnings are likely to be muted over the subsequent quarters in view of the prolonged slowdown in its orderbook replenishment.

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 0.4x (down from 0.5x) 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 May 2019