MRCB’s earnings should pick-up in 2H20 aided by a stronger 4Q20. Construction productivity have hit c.80% vs. pre-Covid levels while meaningful recognition from LRT3 should come in once re-measurement is complete likely in early FY21. Property segment will drive earnings in 2H20 buoyed by handover of projects and progressive billings. Management is still exploring opportunities in WTE. In absence of clear details of HSR’s implementation timeline, we maintain HOLD with TP of RM0.48. Stock trades at FY20/21/22f P/E multiple of 49.7/31.2/21.2x.

We hosted a virtual meeting with management with the following key takeaways:

Construction. Productivity levels are hovering around 80% of pre-pandemic levels with SOP compliance measures disrupting full normalisation. Tenderbook-wise, it remains largely unchanged at RM2.9bn (80% building; 20% infra). Included in this we believe are dated tenders which will likely require tender re-submission. Despite a lacklustre tenderbook, MRCB does boast an impressive orderbook of c.RM16.9bn (ex-equity accounted LRT3), translating to a sector high c.24x cover (mostly long term jobs). This should assuage concerns on longer term construction earnings amidst a slow tender environment.

LRT3. Completion rate for LRT3 remains on track for 40% by year end. The JV is still undergoing a re-measurement process which we think will likely conclude early next year. Stronger earnings recognition is anticipated once the process is finalised.

Property. Earnings from the segment will be buoyed by continuing handover of 1060 Carnegie in 2H20. Project sales in 2H20 have been slow as Melbourne entered fresh lockdowns which were lifted in stages in October. In tandem with this, it is likely that handover has not significantly picked up in 3Q20. Nonetheless, we anticipated higher contribution in 4Q20 as pace of handover picks up, aided by easing restrictions. Meanwhile, domestic projects are still on track with: (i) construction progress at Sentral Suites to achieve 45% by year end and (ii) TRIA, 9 Seputeh targeting 40% by year end).

WTE. Management adopted a more conservative tone as the spike in Covid-19 cases has hampered efforts to diversify into the WTE segment. Recall that earlier in FY20, the government divulged .plans to build 6 WTE plants by 2021 with tenders by Sept2020. We believe pace of projects rollout has been hindered by pandemic resurgence as we observe slow progress in WTE related RFPs/tenders.

Further impairments unlikely. Going forward, impairments are unlikely having undertaken a thorough impairment assessment previously. MRCB recognised a RM197m construction related impairment in 2Q20. Nonetheless, we understand MRCB’s remaining exposure mainly comprises of quasi-government parties which carries lower credit risks.

Forecast. Cut FY20/21/22 earnings by -9.7/-5.7/-0.5% after adjusting downwards our assumptions for (i) FY20 replenishment, (ii) construction margins and (iii) slower handover at Carnegie.

Maintain HOLD, TP: RM0.48. Despite being a frontrunner for the HSR, absence of salient details such as implementation timeline and funding architecture, actual project rollout may only take place over the longer term. As such, we maintain HOLD rating on the stock with a TP of RM0.48. MRCB trades at a FY20/21/22 P/E of 49.7/31.2/21.2x.

Source: Hong Leong Investment Bank Research - 12 Nov 2020