Results

• MRCB reported 1QFY15 results with revenue of RM404.2m (+98% YoY, -17% QoQ) and core earnings of RM17.4m (+45% YoY, Q4FY14: -RM5.3m loss).

• Reported earnings was much higher at RM237.9m, primarily due to RM220.5m in gains following the disposal of Platinum Sentral to MRCB-Quill REIT which was concluded on 30th March.

Deviation

• 1Q core earnings only made up 16% of our full year forecast (18% of consensus). The weaker than expected results was primarily due to lower than expected construction margins.

Dividends

• None. Dividends only declared in 4Q.

Highlights

• Construction margins hit. EBIT margin for the construction division was at a razor thin 1.6% compared to 14.5% in 1QFY14 and 8.3% in 4QFY14. We reckon this was probably due to delays in the Ampang LRT extension which contributed 56% to construction revenue during the quarter. MRCB’s orderbook currently stands at RM1.1bn, implying 2.1x FY14 construction revenue. In terms of potential contract flows, we reckon that MRCB (via a JV with George Kent), stands to be in a good position to secure the PDP works (6% fee) for the LRT3 (RM9bn).

• Property sales kicking in. Property revenue mainly came from its usual KL Sentral developments (Q Sentral and Sentral Residences) as well as growing contributions from 9 Seputeh and PJ Sentral. Unbilled sales amount to RM1.8bn, translating to a strong cover of 2.3x on FY14 property revenue. Sales are also posting a decent showing at RM250m in 1Q compared to only RM60m last year. We have conservatively assumed RM700m in sales this year (FY14: RM1.1bn) due to the tapering property market.

Risks

• Slowdown in the property market may derail MRCB’s turnaround plans as set forth by its new management.

Forecasts

• We cut FY15-16 earnings by 29% and 31% respectively as we impute lower construction margins.

Rating

BUY TP: RM1.70

• Maintain BUY rating as we continue to endorse MRCB as a turnaround play set forth by its new management team. Although the pace is not as swift as we had earlier anticipated, signs of a turnaround are certainly setting in.
• Key catalysts include securing the LRT3 PDP role and successful launch of Kwasa Damansara as well as degearing exercise through sale of assets.

Valuation

• Our SOP based TP is reduced from RM1.88 to RM1.70 following the cut in our earnings forecasts. This implies FY15 P/E of 39x but it reduces to a much more palatable 25.7x and 20.4x for FY16-17 respectively.

Source: Hong Leong Investment Bank Research - 22 May 2015