MRCB’s 1QFY20 core earnings of RM16m were above both ours and consensus expectations. Core earnings were driven by completion and handing over of 1060 Carnegie. MRCB’s outstanding orderbook stands at c.RM16.8bn translating to a tremendous c.24x cover. Unbilled sales amount to RM1.3b representing 2.3x cover on FY19 property revenue. Progress for LRT3 project is at 30% completion with target of 40% by year end. Increase FY20 earnings by 17.9%. Maintain HOLD with higher TP of RM0.50 (from RM0.44) after rolling over earnings to FY21. Our TP implies a FY20/21/22 P/E multiple of 50.1x/32.5x/23.4x.

Above expectations. MRCB reported 1QFY20 results with revenue of RM426.8m (- 10% QoQ, +82% YoY) and core PATMI of RM15.6m (+159% QoQ, +278% YoY). The results were above ours and consensus expectations accounting for 42% of our full year forecast (consensus: 30%).

Deviations. The stronger than expected performance was mainly due to increase contribution from the property segment.

Dividends. No dividends were declared for the quarter (1QFY19: nil).

QoQ. Core PATAMI increased by 159% QoQ despite a 10% decline in overall revenue (construction revenue down 32% QoQ due to MCO) offset by stronger contribution from its higher margin property segment (property revenue up 21% QoQ) which was driven by the completion and handing over of 1060 Carnegie.

YoY. Core earnings increased by 278% YoY driven by higher contributions from property development segment as 1060 Carnegie project was completed and handed over (takeup rate of 88%). YoY increase was compounded by low base effect in 1QFY19 as most development projects were at their initial stages of construction leading to minimal revenue recognised.

Construction. MRCB’s outstanding orderbook stands at c.RM16.8bn (excluding LRT3 as it is equity accounted), translating to a tremendous c.24x cover on FY19 construction revenue. Orderbook is inflated by the disposal of Bukit Jalil Sentral (RM10.9b) to EPF resulting in its recognition as external orderbook. 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. Based on our estimation, c.65% of outstanding orderbook have yet to materially contribute to earnings. LRT3 has achieved a completion rate of c.30% with 40% completion targeted by end 2020.

Property. 1QFY20 revenue from property segment nearly tripled on lumpy recognition of its 1060 Carnegie project upon completion and handover. Unbilled sales amount to RM1.3b representing 2.3x cover on FY19 property revenue. 1QFY20 sales amount to RM36m impacted by the movement restriction. Current completion rate for Sentral Suites is 35% with a target to achieve 45% by year end (takeup rate :82%).

Forecast. Increase FY20 earnings by 17.9% after adjusting for property segment progressive billings assumptions.

Maintain HOLD, TP: RM0.50. Maintain HOLD with higher SOP-driven TP of RM0.50 (from RM0.44) after rolling over valuations to FY21 to reflect a normalised earnings base for the company and revision of MQREIT’s (BUY, TP: RM0.79) target price. Our TP implies a FY20/21/22 P/E multiple of 50.1x/32.5x/23.4x.

Source: Hong Leong Investment Bank Research - 6 Jul 2020