Results

• MRCB announced 2QFY16 results with revenue coming in at RM389m (-27% YoY, -11% QoQ) and barely profitable core earnings of only RM1m (-95% YoY, -74% QoQ).

• In deriving core earnings for the quarter, we remove disposal gains for Sooka Sentral (RM42m) and sale of 40% JV stake to Ekovest (RM3m).

• With 2 consecutive quarters of weak results, 1H core earnings were minuscule at RM5m, plunging -86% YoY.

Deviation

• Needless to say, 1H core earnings were below expectations at 9% of our full year forecast (7% of consensus).

• While revenue was inline at 53% of our forecast, the disappointment continued to stem from construction which suffered a near-zero EBIT margin (0.1%).

• The bulk of construction revenue in 1H came from the Ampang LRT extension which continued to be hampered by variation orders (VOs). With the job now 99% completed (the LRT has been operational since end-June), we are hopeful for a recovery in construction margins in 2H.

Dividends

• None declared.

Highlights

• Sales remain weak. MRCB’s unbilled sales stands at RM1.3bn (2.2x cover in FY15 property revenue), down from RM1.5bn in 1Q. While no quarterly property sales figures were convincingly provided, judging from the movement in its unbilled sales, we estimate this to stand at a mere RM24m in 2Q. This would bring 1H sales to RM166m (1HFY15: RM412m), a stark variance from its full year target of RM1bn.

• Strong contract wins. MRCB’s job wins have been strong YTD at RM1bn (including the Kwasa Damansara PDP role at RM112m). Its orderbook currently stands at RM2.7bn (ex. Kwasa Utama PDP), translating to a healthy cover ratio of 3.5x on FY15 construction revenue.

Risks

• Inconsistency in quarterly core earnings delivery.

Forecasts

• We cut FY17-18 earnings by -60% and -29% after factoring the drag on construction margins and weak property sales.

Rating

Maintain HOLD, TP: RM1.23

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, the issue here as always, is about core earnings delivery.

Valuation

• Despite the earnings cut, our TP is relatively unchanged at RM1.23 (from RM1.22) as we roll forward our valuation horizon which is partially offset by a wider SOP discount from 10% to 25% in view of the weak 1H results delivery

Source: Hong Leong Investment Bank Research - 26 Aug 2016