MRCB’s FY18 earnings of RM22.6m (-77% YoY) were below both our and consensus expectations due to higher than expected tax expenses. MRCB unbilled orderbook stands at c.RM17bn (exclude LRT3 orderbook as it is equity accounted), translating to a tremendous 22.4x cover on FY18 construction revenue. Management is aiming for RM800m sales target in FY19 with RM100m from clearing completed inventories and the rest from launching new projects. Cut FY19-20 earnings forecast by 7.4% and 5.9% respectively after taking into account lower property development margin and lower property sales target. Maintain HOLD rating with higher TP of RM0.72 (from RM0.65).

Below expectations. MRCB reported 4QFY18 results with revenue of RM374.1m (+10% QoQ, -8% YoY) and core profit of RM0.2m (against core loss QoQ, -99% YoY). This brings FY18 core earnings to RM22.6m, decreasing by 77% YoY. FY18 core earnings accounted for 54% of our and 23% of consensus forecast respectively which is below expectations. 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 higher than expected tax expenses.

QoQ. Bottom-line was slightly above breakeven point at RM0.2m against core loss recorded in 3Q mainly due to improved performance from both construction and property segment.

YoY. Core PATAMI plunged and barely broke even mainly due to weaker performance from construction division, partially offset by improved property segment.

YTD. Core PATAMI decreased by 77% mainly due to lower revenue contribution from both property and construction segments.

Construction. MRCB’s orderbook stands at c.RM17bn (excluding LRT3 orderbook as it is equity accounted), translating to a tremendous 22.4x cover on FY18 construction revenue. This is mainly due to recognition of Bukit Jalil Sentral contract as external orderbook after disposing of the project to EPF. Despite the sizable cover ratio, we note that some of the development contracts are long term in nature. Current tenderbook stands at RM2.9bn with 10% from infrastructure jobs and the rest from private sector building jobs.

Property. YTD property revenue and EBIT (excluding land disposal) fell by 24% and 74% 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 RM470m, still short of its revised sales target of RM500m. Management is aiming for RM800m sales target in FY19 with RM100m from clearing completed inventories and the rest from launching new projects. Current unbilled sales stand at c.RM1.6bn which implies a healthy cover of 2.4x on FY18 property revenue.

Forecast. Cut FY19-20 earnings forecast by 7.4% and 5.9% respectively after taking into account lower property development margin and lower property sales target.

Maintain HOLD, TP: RM0.72. Maintain HOLD rating with higher SOP-driven TP of RM0.72 (from RM0.65) after we remove the SOP discount as we deem this is no longer warranted given its much improved balance sheet (net gearing: 0.19x) and eased risk from the LRT3 contract. FY19-20 implied PE of our TP are 44.4x and 35.4x respectively.

Source: Hong Leong Investment Bank Research - 27 Feb 2019