Highlights

• Meeting with management. Last week, we brought a group of 20 institutional clients to meet up with the management of Mitrajaya which was represented by its Managing Director, Mr Tan Eng Piow and Finance Manager, Ms Cho Wai Ling. Much of the meeting was centred on its weak 1HFY17 results with core earnings at RM30m, declining 37% YoY. Despite 1H construction revenue increasing 31%, EBIT margin contracted from 12.9% to 5.2%. This was due to cost overruns for its 2 jobs at RAPID that incurred project loss of over c.RM10m.
• Cost overruns explained. Management explained that the cost overruns at RAPID was due to (i) additional cost to comply with stringent client requirements, (ii) different working procedures and (iii) tighter than expected deadlines. The 2 RAPID jobs currently make up c.3% (RM61m) of its orderbook with completion rates at 71-75%. While the works are expected to be completed in mid-2018, management shared that most of the critical works should be done by end-2017. Management feels that there will be more clarity to margin once the critical works are completed. It will be submitting variation order (VO) claims for the additional cost incurred although the quantum has yet to be finalised.
• Job wins are coming in. Mitrajaya has secured RM811m in new job wins YTD comprising 4 projects. Its orderbook now stands at RM1.8bn, translating to 2.1x cover on FY16 construction revenue. Mitrajaya has bod for RM2bn worth of jobs with another RM700m tenders being under preparation. In the near term, management is hopeful to secure another building job (RM200-250m) before the year ends.
• Launching Wangsa9 Phase 2. Phase 1 (RM380m) of Wangsa9 has achieved take up rate of 60-79%. Mitrajaya will be launching Phase 2 (RM300m) in end-2017/ early- 2018. Aside that, its recent Sri Akasia apartments (RM78m) under the “Rumah Selangorku” housing scheme has seen strong take up rate of 96%. Total unbilled sales of RM233m imply a cover of 2.3x on FY16 property revenue.

Risks

• Continued cost overruns at RAPID.

Forecasts

• Unchanged as we have already factored the cost overruns suffered at RAPID which we assume will continue to drag earnings in 2H17 before recovering in FY18.

Rating

Maintain HOLD, TP: RM1.15 (↓)

• Mitrajaya’s share price has fallen 23% since the release of its 2Q results. Despite that, we see limited upside catalysts in the near term should earnings continue to drag in 2H17.

Valuation

• We change our valuation methodology from SOP (previous TP: RM1.51) driven to P/E based as we believe near term share price performance will closely mirror its results delivery. Our new TP of RM1.15 is premised on a 10x P/E target (5 year mean: 9.3x) applied to FY18 earnings.

Source: Hong Leong Investment Bank Research - 25 Sep 2017