Results

• Mitrajaya reported its 2QFY17 results with revenue coming in at RM302.4m (+8% QoQ, +23% YoY) and earnings of RM11.3m (-40% QoQ, -62% YoY). This brings cumulative 1H earnings to RM30.2m, decreasing 37% YoY.
• The abovementioned results have been adjusted to remove the impact of its compulsory land sale in Pengerang in which Mitrajaya has received payments of RM13m and corresponding profit of RM11.8m.

Deviation

• 1H core earnings only accounted for 30% of our full year estimate which is below expectations. Lower than expected construction margin was the key source of the results disappointment.

Dividends

• None declared.

Highlights

• Construction hit at RAPID. Although 1H construction revenue was up 31% YoY, EBIT fell by 48%. Margin contracted YoY from 12.9% to 5.2% as a result of cost overruns for its projects at RAPID. Management shared that additional costs were needed to comply with the stringent requirements and different working procedures for the 2 RAPID jobs that it is undertaking. As a result of these additional costs, Mitrajaya recorded a loss on its RAPID jobs. It is estimated that the RAPID jobs make up slightly above 10% of its current orderbook of RM1.4bn with target completion date stretching to 2H18.
• Property driven by Wangsa9. The property segment saw 1H revenue and EBIT increasing YoY by 60% and 41% respectively, driven mainly by Wangsa9. Its recently launched affordable housing in Puchong Prima has achieved a 97% take up rate. Overall unbilled sales of RM233m imply a healthy cover of 2.3x on FY16 property revenue.

Risks

• Continued losses for its RAPID projects would be the key risk. Management is in the midst of evaluating its cost structure for these jobs.

Forecasts

• With the lower than expected results, we cut our FY17-19 earnings forecast by 34%, 33% and 27% respectively as we impute lower construction margin dragged from the RAPID projects. Rating Downgrade to HOLD, TP: RM1.51
• Given the results disappointment, coupled with uncertainty on the potential continued drag from RAPID in the coming quarters, we downgrade our rating from Buy to HOLD.

Valuation

• Following the earnings cut, our SOP derived TP is reduced from RM1.89 to RM1.51 which implies FY17-18 P/E of 15.6x and 13.2x respectively.

Source: Hong Leong Investment Bank Research - 29 Aug 2017