1Q18 earnings of RM22m (-52% QoQ, +150% YoY) were below ours and consensus expectations due to lower-than-expected property margin. While the HSR has been cancelled, management expects the LRT3 (10% progress) to go on. MRCB is still awaiting details on the EDL compensation from the ne w government. YTD property sales of RM101m is arguably slow but unbilled sales of RM1.6bn implies a strong cover of 2.1x. Cut FY18 earnings by 10% and lower SOP based TP from RM1.31 to RM0.68. Maintain BUY as share price has fallen 49% YTD.

Below expectations. MRCB reported 1Q18 results with revenue of RM427.6m (+5% QoQ, -18% YoY) and core earnings of RM21.5m (-52% QoQ, +150% YoY). This made up 19% of our full year core earnings forecast (consensus: 13%) which is below expectations. The result disappointment mainly stemmed from lower-than-expected property margin.

Construction margin recovers but... Despite flattish construction revenue, PBT jumped 10-fold YoY due to the low base effect last year (from legacy projects). Construction PBT margin came in at 7.3%, a healthy recovery from the 0.5% witnessed in 1Q last year.

…weaker job flows ahead. On the HSR cancellation (where the MRCB-Gamuda JV was appointed PDP for the northern section), management said that work has not started and no significant cost has been incurred. For LRT3 (MRCB-GKent JV is the PDP) management does not foresee cancellation as work is ongoing (10% progress) with most of the major contracts already dished out. Following the change in administration post GE14, management is cautious on the government contract flow outlook and will be focusing more on private sector and EPF related jobs.

Weak start for property sales. Property revenue and PBT fell by 20% and 50% YoY due to completion of Easton Burwood while most of its other ongoing developments are still at the early stage of constructions. YTD property sales only amounted to RM101m (FY17: RM1.4bn). Nonetheless, unbilled sales of RM1.6bn implies a healthy cover of 2.1x on FY17 property revenue.

Still awaiting decision on EDL. MRCB has ceased tolling on the EDL on 1 Jan and has since handed over the highway to the federal government. Management guides that the only cost incurred on the highway is finance charges. The next payment on its Sukuk will be due in June where management indicates that it will still be able to meet the payment. MRCB has met up with the new administration post GE14 to discuss on the EDL’s compensation but is still waiting on a decision.

Forecast. In view of the lower-than-expected results, we cut FY18 earnings by 10% on lower property margin.

Maintain BUY, TP: RM0.68. Apart from the earnings cut, we also amend our SOP based valuation, namely: (i) assume that the compensation from EDL will equal to its BV, (ii) lower construction P/E target from 16x to 10x to reflect the uncertain job flow outlook and (iii) ascribe a 30% SOP discount. All in all, our TP is reduced from RM1.32 to RM0.68.

Source: Hong Leong Investment Bank Research - 31 May 2018