MRCB’s earnings are likely to bottom in 2QFY20 and pick-up towards 4QFY20. Construction works have hit c.70% vs. pre-Covid levels while meaningful recognition from LRT3 should come in once re-measurement is complete likely in 4QFY20. Property segment will drive earnings this year buoyed by handover of projects and progressive billings. Management sounded optimistic regarding opportunities in WTE where multiple tenders are to be called by GoM. Maintain HOLD with TP of RM0.50. Stock trades at FY20/21/22f P/E multiple of 55.6x/36.1x/26.0x

We Hosted a Virtual Meeting With Management With the Following Key Takeaways:

Construction. MRCB’s orderbook stands at c.RM15.1bn (ex-equity accounted LRT3), translating to a sector high c.22x cover (mostly long term jobs). Management guided that operations are normalising with productivity levels at 70% (vs. pre-MCO). Nonetheless, a key emerging risk is labour constraints due to the freeze in foreign worker recruitment. This, coupled with SOP compliance should impede a full normalisation in productivity levels. Tenderbook stands at an unchanged RM2.5bn (80% building; 20% infra). Included in this are rather smallish ECRL jobs where we reckon award conversion is marginally beneficial given its sizable orderbook.

LRT3. Completion rate of LRT3 stands at 30%, with 40% targeted by end-FY20. The ongoing re-measurement process (originally slated to conclude by mid-FY20) coupled with slow work progress has hampered its earnings recognition so far. Realistically, management is guiding for stronger bottomline contribution materialising towards the backend of FY20. At full pace, LRT3 contribution is RM15-20m p.a. by our estimation.

Property. MRCB expects this segment to be the key earnings driver this year citing (i) ongoing handover of remaining 92 units at 1060 Carnegie project, (ii) construction progress at Sentral Suites with a target to achieve 45% by year end and (iii) TRIA, 9 Seputeh (targeting 40% by year end). While the ongoing handover at 1060 Carnegie is expected to boost earnings this year, recognition could come in towards the end FY20 due to renewed lockdowns in Melbourne.

Sukuk. MRCB announced a RM5b perpetual sukuk Muharabah programme with distribution rate of 4.2%. The programme was given AA- preliminary rating by MARC. We gather the first tranche will be directed towards retiring its existing borrowings (weighted average interest rate of 5.2%) thereby easing its interest burden. In our view, the issuance adeptly capitalises on low interest rates and robust market appetite for risk assets to raise cash given ongoing business uncertainty.

WTE. Management sounded optimistic for its WTE prospects (aiming for concession role). We note that this is against a backdrop of supportive government policies where GoM plans to build 6 WTE plants by 2021 (tenders starting Sept-2020). Based on checks, project IRRs typically fall in the range of c.10-12%. Assuming a 20MW generation capacity (similar to Tanah Merah), this may bring in c.RM80 topline contribution p.a. if a concession role is secured.

Forecast. Maintain earnings forecasts as the meeting yielded no major surprises.

Maintain HOLD, TP: RM0.50. Despite our view of possible HSR revival, we prefer cheaper proxies given MRCB’s trading valuations. MRCB trades at a fair 0.51x FY20f P/B, reflective of its mere FY20-21f ROE of 0.9-1.4%. Potential rally from speculative HSR news flow might not be sustainable given demanding FY20/21/22f P/E multiple of 55.6x/36.1x/26.0x. Maintain HOLD with same TP of RM0.50.

Source: Hong Leong Investment Bank Research - 30 Jul 2020