Results

• Despite having a positive tax of RM38m due to the recognition of deferred tax assets, MRCB posted a core loss of RM43m in 4QFY15. Our core loss computation removes RM70m in disposal gains from the Nu Sentral Mall.
• The core loss virtually wiped out all the gains in the first 3 quarters bringing full year FY15 results to an almost breakeven level of only RM1m (FY14: RM50m profit).

Deviation

• Needless to say, the meagre core profit of RM1m was way below our forecast of RM59m (consensus: RM60m). The weak 4Q numbers was due to a 17% decline in property revenue resulting from (i) delays in Sentral Residences, PJ Sentral and 9 Seputeh, (ii) lower rent for 1Sentral and Sooka and (iii) rental loss from Nu Tower 1 following its disposal.
• The construction division was in the red for 4Q which stemmed from higher preliminary costs to secure the subsequent phase of the Kuala Sg Pahang breakwater job.

Dividends

• Dividend of 2.5 sen was declared in Dec (ex in Jan).

Highlights

• Launch delays. Property sales amounted to RM597m in FY15, down 45% YoY. Management is targeting property sales of RM1bn in FY16, a tall order in our view. Weak property sentiment aside, sales recognition for The Grid (GDV: RM415m with 80% bookings) will be delayed until the MRT2 alignment, which passes through the development, is finalised.
• LRT3 to start by mid-year. MRCB’s orderbook currently stands at RM1.6bn (excluding Kwasa Land C8 works), implying a decent cover ratio of 2.1x on FY15 construction revenue. Management expects the initial PDP fees for the LRT3 (RM9bn) to be booked in June. This is a delay from the previous guidance of 1Q16.

IRni wskihs

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

Forecasts

• We cut FY16-17 earnings by 22-24% as we impute weaker property sales and lower construction margins.

Rating

Downgrade to HOLD, TP: RM1.32

• Whilst MRCB is backed by catalytic projects such as the LRT3, Cyberjaya City Centre, National Sports Complex and Kwasa D’sara, the lack of earnings consistency would eventually thin investor’s patience towards its turnaround plans.

Valuation

• Apart from the earnings cut, we also tag a 10% discount to our SOP based valuation for MRCB, cutting our TP from RM1.63 to RM1.32. This implies a rather pricey FY16-17 P/E of 27x and 21.1x respectively.

Source: Hong Leong Investment Bank Research - 23 Feb 2016