1Q18 core earnings of RM14m (-6% QoQ, -25% YoY) were below expectations due to lower construction margins from higher material and labour cost. Orderbook of RM1.5bn implies a thinning cover ratio of 1.5x. We are turning cautious on the industry’s job flow prospects following the change in administration post GE14. Cut FY18-19 earnings by 14%-24% and downgrade to HOLD with RM0.53 TP (from RM1.15).

Below expectations. Mitra reported 1Q18 results with revenue of RM258.9m (-3% QoQ, -8% YoY) and core earnings of RM14.1m (-6% QoQ, -25% YoY). In deriving core earnings, we remove RM5.1m in land disposal gains from a compulsory acquisition. 1Q core earnings made up 18% of our full year forecast which is below expectations. The result disappointment was due to lower-than-expected construction margin. No dividend was declared.

Hit by higher cost. Construction revenue fell 8% YoY while EBIT declined by a steeper magnitude of 39%. EBIT margin contracted YoY from 8% to 5.3% due to higher material prices (e.g. steel) and labour cost. Mitra has managed to secure 1 contract (RM103m) thus far YTD. Its orderbook now stands at RM1.5bn, implying a thinning cover ratio of 1.5x on FY17 construction revenue.

Cautious on job flows. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. The new administration has stated that it will put all mega projects under review to ensure that the terms are fair to the government and country. We feel that this will result in project award delays (as they are reviewed) or in the worst case, an outright cancellation.

Higher competition for private sector jobs. In the past, Mitra has had a good mix of government related and private sector job wins. Nonetheless, with the potential scaling back of government spending, we feel that competition for private sector jobs could also intensify as other contractors start bidding more aggressively within this space.

Forecast. We cut FY18-19 earnings by 14% and 24% after (i) imputing lower construction margins; and (ii) lower annual job wins target from RM1bn to RM250- 500m.

Downgrade to HOLD, TP: RM0.53. Apart from the earnings reduction, we also lower our P/E target (tagged to mid-FY19 earnings) from 12x to 7x (lower end of its historical P/E range) to reflect the macro job flow slowdown. Downgrade to HOLD (from Buy) as Mitra is faced with margin pressure coupled with a less sanguine industry outlook.

Source: Hong Leong Investment Bank Research - 31 May 2018