Results

• MRCB reported 1QFY16 results with revenue of RM436m (+8% YoY, +12% QoQ) and core earnings of RM4m (-75% YoY, 4QFY15: -RM43m loss).

• Included in the quarter’s results was RM31m in “agency fee” earned from the disposal of NU Tower 2. Had this not been the case, MRCB would have slipped into the red.

• MI was exceptionally high, estimated at 2.6x its subsidiary income, which we reckon was due to the previously mentioned “agency fee” (i.e. not wholly earned).

Deviation

• Needless to say, 1Q results were a disappointment with core earnings at only 5% of our full year estimate (6% of consensus).

• While revenue was inline at 26% of our full year forecast, the disappointment largely stemmed from razor thin construction margins with EBIT level at 0.5% (1QFY15: 1.6%, 4QFY15: 4.6%). Management explained that this was due to variation orders (VOs) being executed for the LRT extension.

Dividends

• None declared.

Highlights

• Weak sales figures. Property sales amounted to RM142m during the quarter, down 43% YoY. Management is targeting to achieve RM1bn in sales this year (FY15: RM597m) which is certainly a tall order in our view. In view of the soft property market, our assumption remains conservative at RM500m. Its unbilled sales of RM1.5bn translate to a cover of 2x on FY15 property revenue.

• Strong contract wins. MRCB’s job wins have been strong YTD at RM813m (including the Kwasa Damansara PDP role at RM112m). Its orderbook currently stands at RM2.2bn, translating to a healthy cover ratio of 2.8x on FY15 construction revenue. Management shared that it has tendered for RM8bn worth of jobs.

Risks

• Inconsistency in core earnings delivery from quarter to quarter.

Forecasts

• We cut FY16-17 earnings forecasts by 28% and 24% as we impute lower construction margins and higher operating expense.

Rating

Maintain HOLD, TP: RM1.22

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, consistency in its core earnings delivery remains the key issue.

Valuation

• Despite the earnings cut, our TP is only reduced slightly from RM1.32 to RM1.22 as the bulk of our SOP valuation comes from the longer term NPV of its property developments.

• Our TP implies a rather pricey FY16-17 P/E of 35x an 26x respectively.

Source: Hong Leong Investment Bank Research - 1 Jun 2016