Results

• MRCB announced 4QFY16 results with revenue of RM1bn (+87% QoQ, +166% YoY) and core loss of -RM12.2m (3QFY16: RM29.4m profit, 4QFY15: -RM43.2m loss). This brings full year FY16 core earnings to RM22.6m (vs an insignificant RM1.1m profit for FY15).
• While headline earnings for FY16 stood at RM268m, this was boosted by several disposal gains (EIs) which include Sooka Sentral (RM41.6m), Menara Shell (RM144.9m) and Kia Peng land (RM56.1m).

Deviation

• FY16 core earnings were below expectations at 41% of our forecast and 25% of consensus.
• The significant deviation largely stemmed from the core loss in 4Q which was likely due to the construction division.

Dividends

• Final dividend of 2.75 sen was declared (FY15: 2.5 sen).

Highlights

• Strong results but weak sales. FY16 property revenue grew +84% YoY largely driven by developments such as Sentral Residences, 9 Seputeh and PJ Sentral. After excluding EIs, property division FY16 PBT increased +93% YoY. In terms of new property sales, after stripping off Menara Shell and the Putrajaya office (sold to SOCSO), this only amounted to RM192m (FY15: RM597m). Management is guiding for RM1.2bn for FY17 which we reckon is a tall order to achieve.
• Construction hit. Despite FY16 construction revenue growing +11% YoY, PBT plunged -67%. PBT margin for FY16 was razor thin at 1.4% vs 4.6% in FY15. This was lagely due to the recognition of full cost for variation order (VO) claims which was not offset by revenue.

In wih Risks

• Inconsistency in quarterly core earnings delivery.

Forecasts

• Given the weak results, we cut our FY17-18 earnings forecast by 10% and 8% respectively after imputing lower construction margins and higher unallocated costs.

Rating

Downgrade to SELL, TP: RM1.25

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, the issue here as always, is about core earnings delivery. This is the 3rd consecutive year that MRCB has recorded a core loss in 4Q.

Valuation

• Following our earnings cut, our SOP based TP is reduced from RM1.37 to RM1.25. This implies an expensive FY17-18 P/E of 42x and 32x respectively.

Source: Hong Leong Investment Bank Research - 28 Feb 2017