Results

1HFY14 core earnings (adjusted for RM94.9m DUKE disposal gain and RM33.7m DUKE extension construction profit) slumped by 83% to RM1.92m (0.12 sen/share), missing estimates by making up only 2% and 3% of ours and consensus earnings estimates respectively.

Deviation

Due to weaker margins for its construction division and slower property contribution.

Dividends

None. Dividends usually declared in 4Q.

Highlights

Results review… 2Q core earnings, after adjusting for DUKE-related EI gain of RM128.6m, swung back to losses of RM10.1m. Losses were due to higher expenses incurred, lower construction margin and slower than expected property billings. Hence, after posting decent earnings in 1Q, 1HFY14 earnings slumped by 83% to RM1.92m.

Construction… Although no longer the core business, the division has RM900m outstanding projects whereby the LRT project is 30% completed.

Property… The 1st phase of 9-Seputeh (GDV: RM1bn) which was launched recently has achieved presales/ bookings of RM600m. Remaining key launch for the year will be Penang Sentral whereby Phase 1 Capex will be RM500- 600m (GDV: RM512m). Although property billings have been slow, the recent successful acquisition of the remaining landbank in PJ Sentral will contribute to future earnings growth as two office towers have already been sold en bloc to MBSB and MyIPO for RM239.2m and RM250m respectively. Overall, unbilled property sales remained healthy at RM1.8bn whereby RM1bn is made up of QSentral and Sentral Residences.

Started tolling... EDL has proceeded tolling in August with an average daily traffic of 47k vehicles and toll rate of RM6.80. Management expects to breakeven at the EBITDA level for 2014.

Rights issue?... With the absence of EDL disposal, we to do not discount the possibility of a rights issue given the funding requirement for Penang Sentral and Kwasa Damansara development.

Risks

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

Forecasts

Slashed FY14 earnings by 51.3% to RM40.5m while maintaining FY15 earnings.

Rating

BUY

Although 2Q core results swung to losses, we remain optimistic that the new management will be able to turnaround MRCB’s operations and positive on the degearing exercise. Hence, we maintain our long term BUY call giving its strategic landbank development.

Valuation

TP slashed by 2.5% to RM1.97 based on SOP valuation (see Figure #3).

Source: Hong Leong Investment Bank Research - 25 Aug 2014