Results Highlights

• Mitrajaya sank deeper into the red as 2Q2019 net loss stood at RM14.5 mln vs. a net profit of RM10.3 mln recorded in the previous corresponding quarter, dragged down by lower contribution in the construction segment that saw delays in collection from certain completed projects. Revenue for the quarter decreased 29.7% Y.o.Y to RM145.4 mln. For 1H2019, cumulative net loss stood at RM18.8 mln vs. a net profit of RM29.5 mln recorded in 1H2018. Revenue for the period declined 29.9% Y.o.Y to RM330.9 mln.

• The reported earnings came below our expectations as we expected Mitrajaya to chalk-in net profit of RM15.8 mln in 2019, while revenue came slightly below our expectations, accounting to 42.3% of our RM783.1 mln revenue forecast for the year. The difference in its bottomline is mainly due to lower-than-expected contribution from the construction segment amid its depleting unbilled orderbook.

• Segmentally, the group’s 1H2019 construction pretax loss stood at RM30.7 mln vs. a pretax profit of RM10.3 mln recorded in 1H2018 in view of the reduction of on-going projects on hand. The property development segment’s pretax profit slipped 50.4% Y.o.Y to RM13.5 mln on higher operational cost, coupled with the sluggish sales. The South Africa property development segment’s pretax profit was relatively flat at RM0.3 mln in absence of new launches.

• As of 2Q2019, Mitrajaya’s net gearing stood at 0.4x (unchanged from 1Q2019).

Prospects

Mitrajaya has bagged its first major construction project valued at RM90.0 mln for the refurbishment of Pullman Putrajaya Lakeside Hotel. This makes up to only 30% of our orderbook replenishment target of RM300.0 mln for 2019. Hence, we slashed our orderbook replenishment assumption to RM200.0 mln for both 2019 and 2020 respectively (down from RM300.0 mln previously). As a result, its depleting unbilled construction orderbook of RM815.8. mln, implying an orderbook-to-cover ratio of 1.2x of 2018’s construction revenue of RM698.8 mln, will sustain the segment’s earnings over the next one-and-a half years.

On the property development segment, no new launches were made in 2Q2019. Moving forward, the group’s unbilled sales of RM89.1 mln, mainly from Wangsa 9 Residency and the affordable housing project – Seri Akasia to see progressive contribution in latter part of the year.

On its property development project in South Africa, we continue to expect minimal contribution from the four unsold bungalow units valued at RM5.0 mln that was completed in November 2018, coupled with rental income from the Blue Valley Shopping Mall. In the meantime, the 3-storey walk up high-end apartments comprises of 42 units of apartments and carries an estimated GDV of RM15.0 mln will only see contribution from 2020 onward.

Valuation and Recommendation

With the reported earnings coming below our estimates, we now expect Mitrajaya to remain in the red with net losses of RM32.4 mln and RM26.8 mln (from net profit of RM15.8 mln and RM16.0 mln) for 2019 and 2020 respectively, in view of the depleting construction orderbook. Consequently, we maintain our SELL recommendation on Mitrajaya with a lower target price of RM0.25 (from RM0.30).

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 2020 construction earnings, while its local and overseas property development units are valued at 0.4x of their respective book values.

A potential re-rating and upward revision of our target price are in the cards should the orderbook replenishment exceeded our target and a reduction in input cost will boost its construction and property development margins. Further easing of credit facilities from financial services providers will be positive for the general property market and the sale of its properties.

Source: Mplus Research - 30 Aug 2019