MRCB’s 1HFY19 bottom-line turned to core loss of RM43.9m which was way below both ours and consensus expectations. YTD bottom-line turned to core loss due to lower revenue contribution from all segments and lower contribution from MRCB-GKent JV due to continued delay of LRT3 which will only resume in 4QFY19 (as opposed to previous expectations of mid-2019) and back to full swing in FY20. Cut FY19-21 earnings forecast by 5-30%. Maintain HOLD with lower TP of RM0.80 (from RM0.86) after earnings forecast adjustment and revision of MQREIT’s TP.

Below expectations. MRCB reported 2QFY19 results with revenue of RM241m (+3% QoQ, -29% YoY) and core loss of RM43.9m (against core profit both QoQ and YoY). This brings 1HFY19 core loss to RM39.8m (against RM31.2m core profit in 1HFY18), which is way below expectations. Core loss is adjusted for RM55m gain resulting from disposal of 30% in St Regis.

Deviations. The lower than expected performance was mainly due to lower revenue contribution from all segments and continued delay in LRT3 package due to ongoing cost optimisation. LRT3 project will only resume in 4QFY19 (as opposed to previous expectations of mid-2019) and back to full swing in FY20.

QoQ/ YoY. Bottom-line turned to core loss (against core profit recorded both QoQ and YoY) mainly due to lower revenue contribution from all segments.

YTD. Bottom-line turned to core loss due to lower revenue contribution from all segments and lower contribution from MRCB-GKent JV due to continued delay of LRT3.

Construction. MRCB’s orderbook stands at c.RM16bn (excluding LRT3 orderbook as it is equity accounted), translating to a tremendous 20.7x cover on FY18 construction revenue. This is mainly due to recognition of Bukit Jalil Sentral contract as an external orderbook after disposing of the project to EPF. Despite the sizable cover ratio, we note that some of the development contracts are very long term in nature which will not translate to near term revenue.

Property. 1H19 revenue from property segment declined 62% YoY due to (i) no revenue being recognised from the sale of completed unsold units which had yet to achieve sales and purchase completion and (ii) the company’s key high rise residential development projects currently being in the early phase of construction where revenue recognition is minimal. YTD property sales stands at RM244m and current unbilled sales stand at c.RM1.8bn which implies a healthy cover of 2.7x on FY18 property revenue.

Forecast. Cut FY19-21 earnings by 30.2%, 5.6% and 5.3% respectively after adjusting LRT3 progress and property unbilled sales recognition assumptions.

Maintain HOLD, TP: RM0.80. Maintain HOLD with lower SOP-driven TP of RM0.80 (from RM0.86) after earnings forecast adjustment and revision of MQREIT’s (HOLD, TP: RM1.09) target price.

Source: Hong Leong Investment Bank Research - 27 Aug 2019