MRCB’s 9MFY18 earnings of RM22.4m (-59% YoY) were below both our and consensus expectations due to lower than expected contribution from property development division. We understand that MRCB-Gkent JV would not recognise any revenue from LRT3 contract in 4Q18 until signing of new contract which is expected in December 2018. Property sales target revised downwards to RM500m after disappointing sales performance. Cut FY18-20 earnings forecast by 33-44% after taking into account lower property development margin and lower property sales target. Maintain HOLD rating with lower TP of RM0.65 (from RM0.71) following earnings forecast adjustment.

Below expectations. MRCB reported 3QFY18 results with adjusted revenue of RM340.8m (flat QoQ, -70% YoY) and core loss of RM8.8m against core profit both QoQ and YoY. This brings 9MFY18 core earnings to RM22.4m, decreasing by 59% YoY. 9M core earnings accounted for 30% of our and 21% of consensus forecast respectively which is below expectations. 9M revenue and core earnings are adjusted for Penang and Kia Peng lands disposal amounting to c.RM388m and c.RM69m 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. Bottom-line turned to core loss mainly due to lower revenue contribution from both property and construction segments.

YTD. YTD core PATAMI decreased by 59% mainly due to lower revenue contribution from both property and construction segments.

LRT3. Management provided further clarification on the new LRT3 contract model which is in-line with our earlier expectation as we opine that the major difference between old PDP and new fixed priced model is that 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. We understand that MRCB-Gkent JV would not recognise any revenue from LRT3 contract in 4Q18 until signing of new contract which is expected in December 2018.

Property. YTD property revenue and EBIT (excluded impact from land disposal) fell by 25% and 82% 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 RM356m which caused management to revise sales target to c.RM500m (from RM700m) Nonetheless, unbilled sales of RM1.6bn implies a healthy cover of 2.2x on FY17 property revenue.

Forecast. Cut FY18-20 earnings forecast by 43.9%, 37.8% and 33.3% respectively after taking into account lower property development margin and lower property sales target.

Maintain HOLD, TP: RM0.65. Maintain HOLD rating with lower SOP-driven TP of RM0.65 (from RM0.71) following earnings forecast adjustment. Our TP is pegged to a 20% discount to SOP value (RM0.81). FY18-20 implied PE of our TP is expensive 67.9x, 38.0x and 30.8x respectively.

Source: Hong Leong Investment Bank Research - 23 Nov 2018