Results

• MRCB reported 2QFY17 results with revenue of RM756.5m (+44% QoQ, +94% YoY) and core earnings of RM17.9m (+71% QoQ, >100% YoY). Our derivation of core earnings removes RM5.5m in disposal gains on Dekad Kaliber (engineering) and Semasa Services (parking).
• Cumulative 1H core earnings amounted to RM28.3m, up 4- folds YoY given the low base effect.

Deviation

• 1H core earnings were within expectations at 48% of our full year estimates but below consensus at 22%.

22 Dividends

• None declared.

Highlights

• Property sales flowing in. 1H property revenue increased 29% YoY but core EBIT fell 31%. The latter effect was due to last year’s higher base from (i) agency fee earned for the sale of Nu Tower 2 and (ii) contribution from Menara Shell pre-disposal. MRCB achieved strong property sales of RM942m in 1H (69% contributed by Sentral Suites), a stark improvement from the RM192m achieved for the entire FY16. Management is aiming for RM1.2bn in sales this year. Unbilled sales stands at RM1.6bn, implying 1.4x cover on FY16 property revenue.
• Construction margin improves but still thin. Construction revenue rose in 1H by 110% YoY. Coupled with margin recovery from a low base of 0.5% to 2.2%, 1H EBIT increased 9-folds YoY. Despite the recovery, we remain cautious on the construction segment which is probably breaking even at best with EBIT margin at 2.2%. Orderbook stands at RM2.2bn (excluding PDP contracts and Kwasa C8) which translates to 2.4x FY16 construction revenue.

In w ih Risks

• Inconsistency in quarterly core earnings delivery and significant EPS dilution from impending 1-for-1 rights issue.

Forecasts

• Unchanged as the results were inline.

Rating

Maintain HOLD, TP: RM1.09 (ex rights)

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, we remain concerned on its core earnings delivery and sustainable management of its net gearing.

Valuation

• While there are no changes to our earnings forecast, we lower our ex-rights SOP derived TP from RM1.12 to RM1.09 after updating for balance sheet items. Our ex-rights TP is based on the assumption that the 1-for-1 right issue will be done at a rights price of RM1.00.

Source: Hong Leong Investment Bank Research - 30 Aug 2017