• 1HFY22 results were broadly in line; strong recovery in 1H earnings but 2H22F may see weaker performance on weaker billings and labour shortage.
• We are cautious on 2HFY22F job flow outlook post-conference call. MRT 3 tenders, if successful, could reinstate contract catalysts.
• Reiterate Hold rating with a lower TP of RM0.37 (60% discount to RNAV).

1HFY22 results broadly in line; seeing signs of a weaker 2H22F

MRCB’s 1HFY22 performance was impacted by several factors: 1) high property sales cancellations of RM33m in 2QFY22, a jump from RM4m in 1QFY22 – due to slow site progress, extension of time (EOT) and higher interest rates; and 2) lower site productivity for LRT 3 (consolidated with 100% stake), as the impact from higher labour costs and labour shortages filtered through. Although 1HFY22 core net profit made up 53% of our and consensus full-year forecasts, we deem the performance broadly in line as, due to the factors mentioned above, 2HFY22 revenue earnings could be weaker hoh. We believe this would be due to: 1) sustained impact of low LRT 3 productivity; and 2) timing of the recognition of property sales replacement. 2QFY22 revenue jumped 210% yoy but fell 14% qoq on weaker infra billings and sales cancellations, while 1HFY22 revenue surged 234% yoy largely due to the consolidation of LRT 3 project with 100% stake. 1HFY22 EBITDA margin stood at 8.3% vs. our FY22F forecast of 6%; we expect weaker EBITDA margin in 2HFY22F. Overall, 1HFY22 core net profit of RM28.1m was a strong turnaround from the RM27.2m core net loss in 1HFY21. No dividend was declared, as expected.

Highlights from results conference call

Key takeaways from results conference call: 1) labour shortage and higher labour costs for LRT 3 could extend into 2HFY22F though the impact of higher material costs remains manageable (prices of key materials could stay volatile in the medium term); 2) construction tender book has declined substantially from over RM400m in Jan 22 to RM35m currently; 3) new tender visibility focuses on MRT 3 tender submissions in Sep 22, flood mitigation projects, new packages for the Pan Borneo Highway (PBH) Sabah, and potential additional works for LRT 3 amounting to c.RM1bn. We came away from the conference with a more cautious stance on MRCB’s job outlook in 2H22F, weighed by preelection uncertainties on job rollout, while new property launches are only targeted in 4QFY22. As at end-2QFY22, unbilled property sales amounted to RM707m.

Reiterate Hold rating with a lower TP

We maintain our FY22-24F EPS forecasts. Reiterate Hold as we see limited potential catalysts for the stock. Our TP is lowered to RM0.37 as we update balance sheet items, still pegged to a 60% discount to RNAV. Upside risks include an improvement in tender book, MRT 3 contract win and stronger earnings. Downside risks include delays in new contract wins and weaker earnings due to further impact of labour shortage and higher labour costs.

Source: CGS-CIMB Research - 31 Aug 2022