MRCB’s 1HFY20 core loss of –RM1.5m were within both ours and consensus expectations. Core earnings were driven by completion and handing over of 1060 Carnegie. MRCB’s outstanding orderbook stands at c.RM16.9bn translating to a tremendous c.24x but a large chunk is long dated jobs. Unbilled sales amounts to RM1.3bn representing 2.3x cover on FY19 property revenue.

Cut FY20-22 earnings by 2-3%. Maintain HOLD with unchanged TP of RM0.50. Our TP implies a FY20/21/22 P/E multiple of 51.4x/33.6x/24.1x.

Within expectations. MRCB reported 2QFY20 results with revenue of RM167.2m (- 61% QoQ, -31% YoY) and core loss of -RM17.1m (against core earnings of RM15.6m in 1QFY20 and core loss of –RM43.9m in 2QFY20). This brings 1HFY20 to a near breakeven (-RM1.5m) vs core loss of -RM39.8m in 1HFY19. We deem the results largely within expectations as we anticipate stronger 2H showing (we projected FY20 core earnings of RM43.8m; while consensus projected core earnings of RM44.1m). Note that figures have been adjusted for receivables and contract asset impairment of RM202.5m.

Dividends. No dividends were declared for the quarter (1HFY20: nil; 1HFY19: nil).

QoQ. 2QFY20 turned into core loss of –RM17.1m (vs. core PATAMI of RM15.6m in 1QFY20). Main contributor for the loss was imposition of MCO where revenue decline by -61% led by construction (-68%), property (-58%) followed by facilities management (-25%) segments. While the others managed to stay marginally profitable, construction segment went into losses of –RM10.8m at EBIT level. 1QFY20 was also buoyed by handover of 1060 Carnegie project which substantially slowed due to lockdowns in Melbourne.

YoY. Core loss narrowed from –RM43.9m in 2QFY19 mainly due to much leaner operating expenses (impairment adjusted) which fell by -35% resulting from better cost management initiatives.

YTD. Core loss narrowed from –RM39.8m in 1HFY19 resulting from topline growth of 25%, anchored by doubling of revenue contribution from the property segment. This was due to handover of 1060 Carnegie project where 79 units achieved financial close (1QFY20: 59 units; 2QFY20: 20 units). Property contribution in 1HFY19 was also exceptionally depressed resulting from suboptimal construction stage for its projects.

Construction. MRCB’s outstanding orderbook stands at c.RM16.9bn (excluding LRT3 as it is equity accounted), translating to a sizable c.24x cover on FY19 construction revenue. 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. LRT3 has achieved a completion rate of c.30% with 40% completion targeted by end 2020. During the quarter, MRCB impaired contract asset of RM197m for a recently completed hospitality project as client looks to be severely impacted by lockdowns.

Property. Unbilled sales amounted to RM1.3b representing 2.3x cover on FY19 property revenue. 1HFY20 sales amount to RM84m impacted by the movement restriction. Things are recovering with RM102m sales achieved by end-July. Management is confident of achieving its RM250m-300m target backed by bookings of RM160m. Barring any further lockdowns, we expect rebound into 2HFY20 backed by Carnegie project.

Forecast. Cut FY20-22 earnings by 1.7/2.6/2.2% as we take the lower end of management’s sales guidance.

Maintain HOLD, TP: RM0.50. Maintain HOLD with unchanged SOP-driven TP of RM0.50. Despite the earnings cut, our TP remains unchanged after updating for MQREIT TP of RM0.85. Our TP implies a FY20/21/22 P/E multiple of 51.4x/33.6x/24.1x.

Source: Hong Leong Investment Bank Research - 28 Aug 2020