News

• Secures 2 contracts. MRCB announced that it has secured 2 contracts totalling RM409m. These comprise of (i) a subcontract for the D’sara-Shah Alam Highway (DASH) worth RM369m from Turnpike Synergy to be completed within 26 months and (ii) Balai Islam and staff quarters worth RM40m from Tenaga Nasional to be completed over 15 months.

Comments

• New job wins after a slow 1H. With no contracts secured in 1H17, these 2 job wins are MRCB’s first for the year. Assuming a burn rate of RM500m in 1H17 (1Q: RM243m), these new contracts would bring MRCB’s orderbook to an estimated RM2.1bn (excluding PDP based contracts). This implies a cover of 2.2x on FY16 construction revenue. Management guides that it is bidding for RM6bn worth of jobs.
• All eyes on margins. Our key concern for MRCB’s construction division remains its ability to deliver decent and consistent margins. Construction EBIT margin was razor thin (with some losses) in 4 out of the last 6 quarters.

Risks

• Inconsistency in quarterly core earnings delivery and significant EPS dilution from the impending rights issue.

Forecasts

• Unchanged as YTD job wins of RM409m is still within our full year orderbook replenishment target of RM800m.

Rating

Maintain HOLD, TP: RM1.12 (ex rights)

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, the issue here as always, is about core earnings delivery and a long term sustainable management of its net gearing.

Valuation

• Our unchanged SOP based TP (20% discount) of RM1.12 is on an ex-rights basis which assumes a rights price of RM1.00. This implies a rather expensive ex-rights P/E of 86x and 60x on FY17-18 earnings.

Source: Hong Leong Investment Bank Research - 16 Aug 2017