Mitra’s 1HFY18 earnings of RM18.1m (-40% YoY) were below both our and consensus estimates. YTD core PATAMI decreased due to lower construction margin attributable to timing gap between new and completed projects. Mitra has managed to secure 1 contract (RM103m) thus far YTD. Its orderbook now stands at RM1.3bn, implying a thinning cover ratio of 1.3x on FY17 construction revenue. Cut FY18-20 earnings by 23-34% after taking into account lower construction margin. Downgrade to SELL with lower TP of RM0.38 (from RM0.53) following earnings cut.

Below expectations. Mitra reported 2QFY18 results with revenue of RM200.6m (- 23% QoQ, -34% YoY) and core earnings of RM4.0m (-72% QoQ, -65% YoY). This brings 1HFY18 core earnings to RM18.1m, decreasing by 40% YoY. 1H core earnings accounted for 27% and 37% of HLIB and consensus full year forecast respectively, which is below expectations. This is mainly due to lower than expected construction margin. In deriving core earnings, we remove RM10.33m in land disposal gains from a compulsory acquisition. No dividend was declared.

Lower construction margin. 1H construction revenue fell 21% YoY while EBIT declined by 61%. EBIT margin contracted YoY from 5.2% to 2.5% mainly due to timing gap between new and completed projects coupled with higher material prices and labour cost. Mitra has managed to secure 1 contract (RM103m) thus far YTD. Its orderbook now stands at RM1.3bn, implying a thinning cover ratio of 1.3x 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. HSR, MRT3 and ECRL have been shelved and LRT3 has been downsized. As a result, about RM105bn worth of local content of mega projects will be removed over the next 2 years based on our estimation. Although Mitra is less involves with public infrastructure jobs relative to private sector jobs in the past, we reckon competition for private sector jobs will intensify going forward as other contractors start bidding more aggressively within this space.

Forecast. Cut FY18-20 earnings forecast by 23%, 33% and 34% respectively after take into account lower construction margins.

Downgrade to SELL, TP: RM0.38. Downgrade to SELL rating with lower TP of RM0.38 (from RM0.53) following earnings cut. TP is pegged to 7x P/E multiple to mid FY19 earnings. The domestic construction industry landscape is expected to remain challenging and we expect continued margin pressure due to more competitive private sector jobs following reduction of government spending on infrastructure. Moreover, the weakness in property market further dampens the company’s property division prospect.

Source: Hong Leong Investment Bank Research - 28 Aug 2018