Results

1HFY13 core earnings slumped by 60% to RM11.1m (0.8 sen/share), missing both ours and consensus estimates by making up 15% of full year forecast.

Deviation

Due to weaker than expected contribution from both construction and property division. Our estimate also includes contribution from the Nusa Gapurna merger which has yet to consolidate their earnings with MRCB.

Dividends

None. Usually declared in the 4Q.

Highlights

YoY… 2Q revenue fell by 46% to RM185.7m, due to sudden drop in construction billings, which is heavily reliant on the progress of the LRT Extension project. Despite the drop in revenue, PATAMI still managed to post YoY growth of 13% to RM5.8m due to lower MI charges arising from its property development subsidiary. Additionally, last year’s corresponding period was also coming from a low earnings base.

QoQ… Despite the recovery in property revenue, 2Q revenue still plunged by 29%, mainly due to the construction division. EBIT margin for the quarter expanded to 25% from 15% in the previous quarter. As a result, sequential earnings grew by 11%.

1HFY13… 1HFY13 revenue fell by 33%, due to decline in activities for both the construction and property division. Despite higher EBIT margin, the higher financing expenses arising from EDL’s sukuk coupled with poor showing in 1QFY13, earnings fell by 60%.

Risks

Execution risk; Regulatory and political risk; Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

FY13-14 earnings slashed by 11.1% and 6.4%. Our estimates include potential development profits from Nusa Gapurna’s PJ Sentral.

Rating

BUY

MRCB’s earnings will continue to see near term weakness as the construction division has yet to replenish its order book while new property sales from QSentral and Sentral Residences have been disappointing with no new development launches. However, we remain optimistic on its longer term prospects. Hence, we are maintaining our long term BUY call on the company.

Positives: (1) Completion of Nusa Gapurna merger; (2) New construction contract wins; (3) Acquiring strategic land banks; (4) Favourable buyout terms for EDL.

Negatives: (1) Concerns over execution for projects; (2) Concerns over take-up rates for property launches; (3) Delays by the Government to buyout EDL; (4) High net gearing levels; (5) Short-term earnings dilution arising from share swap with Nusa Gapurna.

Valuation

Target Price trimmed by 0.5% to RM2.14 based on Sum-of- Parts Valuation (see Figure #3).

Source: Hong Leong Investment Bank Research - 27 Aug 2013