Results

• MRCB reported 2QFY15 results with revenue of RM530.3m (+63% YoY, +31% QoQ) and core earnings of RM21.3m (-10% YoY, +23% QoQ). In deriving core earnings, we have stripped out RM38.8m from the gain on disposal of its Salak South land.
• For the cumulative 1H period, core earnings amounted to RM38.7m, a 9% YoY increase. Apart from the removal of the Salak South land gain on disposal, we also stripped out the gains from the disposal of Plaza Sentral (RM220.5m) which was booked in 1Q.

Deviation

• 1H core earnings made up 49.6% of our full year estimates (47.5% of consensus) which we regard to be within expectations.

Dividends

• None. Dividends are usually declared in 4Q.

Highlights

• Write backs help improve margins. EBIT margin for the construction division recovered QoQ from 1.6% to 8.2%. Management guided that this was assisted by write backs for the liquidated ascertained damages (LAD) incurred for the construction of Nu Sentral Mall which was booked in FY13. We estimate MRCB’s orderbook to stand at RM1.5bn, implying a strong cover of 3x its FY14 construction revenue. YTD job wins of RM643m have also surpassed our full year target of RM500m. Further upside to job wins could potentially come from the LRT 3 (RM9bn) PDP role in which the MRCB-GKent JV is touted to be the frontrunner.
• Lower property sales. Property revenue mainly came from its usual KL Sentral developments (Q Sentral, which has been completed, and Sentral Residences) as well as growing contributions from 9 Seputeh and PJ Sentral. Unbilled sales amount to RM1.7bn, translating to a strong cover of 2.2x on FY14 property revenue. Property sales for 1H amounted to RM412m, down 39% YoY. Nonetheless, this is within our full year target of RM700m (59% achieved as of 1H).

IRni wskihs

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

Forecasts

• No changes to estimates as the results were inline.

Rating

BUY, TP: RM1.19

• 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 present.

Valuation

• Although we retain our BUY rating, we now apply a 30% discount to our SOP valuation, which we feel is appropriate given the weak broad market sentiment.
• As such, our TP is cut from RM1.70 to RM1.19 which implies FY15 P/E of 27.4x but a more palatable 18x on FY16 once its earnings recovery sets into motion.

Source: Hong Leong Investment Bank Research - 25 Aug 2015