Results

• MRCB reported 4QFY17 results with revenue coming in at RM408m (-64% QoQ, -60% YoY) and core earnings of RM45m (+60% QoQ, +9% YoY).

• Full year FY17 core earnings amounted to RM101m, increasing 33% YoY. In deriving core earnings, we have removed disposal gains on (i) Dekad Kaliber and Semasa Kaliber of RM5.5m and (ii) 59INC of RM60.8m.

Deviation

• FY17 core earnings were above our expectations and consensus at 143% and 114% of full year forecast respectively. The stronger than expected results was due to lower finance cost and higher construction margin.

Dividends

• Final dividend of 1.75 sen (FY16: 1.4 sen).

Highlights

• Property lower but... FY17 property revenue and EBIT (adjusted for EIs) declined 35% and 60% YoY. This was due to the completion of Sentral Residences, Easton Burwood in the early part of FY17 while newer developments were still at the initial stage of construction.

• …new sales were strong. MRCB recorded property sales of RM1.4bn in FY17, beating its own target of RM1.2bn and a stark YoY improvement from RM192m in FY16. Unbilled sales of RM1.7bn imply over 2x cover on FY17 property revenue. For FY18, management is aiming for RM1bn in sales (vs our assumption of RM800m).

• Construction margin expansion. Construction EBIT grew 7-folds in FY17 thanks to margin expansion which was most significantly witnessed in 4Q. Margin was thin in the past due to the National Sports Complex job (via land payment) which booked 0% margin.

• EDL resolution underway. Tolling along EDL has ceased effective this year and the highway has been gazetted as a federal road. MRCB will no longer have to borne any maintenance cost on the highway but will continue to incur finance charges until the Sukuk is settled. Management is hopeful for a resolution by 1H18. Removal of the EDL Sukuk would cut MRCB’s net gearing from 54% currently to 32%.

Risks

• Volatile core earnings delivery from quarter to quarter.

Forecasts

• We raise FY18-19 earnings by 25% and 19% after imputing higher construction margin.

Rating

Upgrade to BUY, TP: RM1.31

• Given its healthier balance sheet post rights issue, we reckon that MRCB is now in a much better position to execute its various catalytic projects. The disposal of EDL should serve as a near term catalyst. With share price down 16% since its year high in Jan, we feel there is sufficient buffer to warrant an upgrade to BUY (from Hold).

Valuation

• Following the increase in our earnings forecast, we upgrade our SOP based TP from RM1.26 to RM1.31.

Source: Hong Leong Investment Bank Research - 1 Mar 2018