MRCB’s 1HFY18 earnings of RM31.2m (+18% YoY) were below both our and consensus expectations due to lower than expected contribution from property development division. YTD core PATAMI increased by 18% due to higher construction margin. We understand that the new LRT3 model will be structured as design & build contract with MRCB-Gkent JV remaining as the single point of responsibility to the government and a fixed lump sum contract value is determined. The contract value is estimated to be at an amount between RM9bn to RM16bn. Cut both FY18 earnings forecast by 13% after taking into account slower property revenue recognition. Maintain HOLD rating with lower TP of RM0.60 (from RM0.65) following earnings cut and roll forward of valuation horizon from FY18 to FY19.

Below expectations. MRCB reported 2QFY18 results with adjusted revenue of RM340.7m (-20% QoQ, -55% YoY) and core earnings of RM9.7m (-55% QoQ, -46% YoY). This brings 1HFY18 core earnings to RM31.2m, increasing by 18% YoY. 1H core earnings accounted for 36% of our and 19% of consensus forecast respectively which is below expectation. Revenue and core earnings are adjusted for Penang land disposal amounting to c.RM65m and c.RM24m respectively.

Deviation. Results were below expectations mainly due to lower than expected contribution from property development division due to completion of Easton Burwood while most of its other ongoing developments are still at the early stage of construction.

QoQ/ YoY. QoQ and YoY core PATAMI decreased by 55% and 46% respectively mainly due to lower property margin, partially offset by higher construction margin.

YTD. YTD core PATAMI increased by 18% mainly because of higher construction margin, partially offset by lower revenue from property development division.

LRT3. The potential new model of LRT3 contract was the main discussion topic during the conference call. We understand that the new LRT3 model will be structured as design & build contract with MRCB-Gkent JV remaining as the single point of responsibility to the government and a fixed lump sum contract value is determined. The contract value is estimated to be at an amount between RM9bn to RM16bn. We opine that the major difference between old PDP and new fixed priced model is the contract value will be fixed in the new model to prevent any incentive for the project manager (which is the PDP in this case) to inflate the project costs.

Property. YTD property revenue and EBIT fell by 28% and 70% YoY due to completion of Easton Burwood while most of its other ongoing developments are still at the early stage of construction. YTD property sales only amounted to RM261m. Nonetheless, unbilled sales of RM1.7bn implies a healthy cover of 2.2x on FY17 property revenue.

Forecast. Cut FY18 earnings forecast by 13.0% after taking into account slower revenue recognition from property development division.

Maintain HOLD, TP: RM0.60. Maintain HOLD rating with lower SOP-driven TP of RM0.60 (from RM0.65) following earnings cut and roll forward of valuation horizon from FY18 to FY19. FY18-20 implied PE of our TP are 35.4x, 24.5x and 23.3x respectively.

Source: Hong Leong Investment Bank Research - 3 Sept 2018