Coming quarterly results (2Q & 3Q) are expected to be challenging with operating rate fluctuating between nil-30% over the past 2 months. We also foresee slower ramp up coming out of restrictions this year due to sticky supply chain issues. On the brighter side, MRCB has submitted a proposal for MRT3 likely to be a deferred payment structure, in our view. General tender landscape has been slow with minimal sizable opportunities. We believe most property launches could also be delayed to 2022. Cut FY21/22/23 forecasts by -10.2%/- 3.4%/-2.1%. Maintain HOLD with lower TP of RM0.41. We believe political fluidity coupled with limited upside catalysts could pose a continued drag on near term performance while its low P/B trading multiple of 0.34x might cushion further downside.

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

Restriction update. Unsurprisingly, the coming quarterly results (2Q & 3Q) are expected to be challenging. This is predicated by various impositions of ongoing phase 1 restrictions and EMCO. Back in June, MRCB was able to get its infrastructure jobs (31% of order book) online during phase 1 while on the property side only TRIA , 9 Seputeh was permitted to work (24% of unbilled sales), all of which were halted by the two week EMCO in July. At present, the company has gotten back to 20-30% of their normal operating rate. We reckon further normalisation would require a transition towards phase 2 as building jobs face approval challenges in phase 1 (marginal order book contribution outside KV).

Slower ramp, likely. FY21 has seen additional supply chain challenges beset by labour and materials shortages. The former has seen a deteriorating trend since early this year based on feedback from industry players due to tight containment measures as well as foreign workers leaving, draining the pool of available labour. On the materials side, quarry, steel and cement operations in Selangor would only meaningfully resume in phase 2 and indications are inventories are already running low (nil production for 2 months). We foresee lingering supply chain issues moving forward with labour to remain a sticky issue considering high number of cases and slow vaccination rates at source countries. Unless mitigating measures are implemented, operational ramp up is likely weaker this year.

Construction. MRCB has submitted a proposal in relation to the MRT3 project. The proposal could consist of deferred payment structure rather than participation in property development components, in our view. Assuming that net gearing increases to a manageable 0.6x, MRCB could raise a sizeable RM1.6bn to facilitate the execution of deferred payment contracts. Until further MRT3 developments unfold (2022 barring political fluidity), MRCB will have to contend with executing its existing order book c.RM17bn (excluding LRT3; equity accounted), translating to a sizable c.32x cover on FY20 construction revenue which are significantly comprised of long term projects. As for construction tender landscape, MRCB has not encountered any sizable tender worth participating in this year; consistent with our tracking of contract flows.

Property. We believe management would have to delay some of its planned launches to 2022. Management had earlier aimed to launch GDV RM1.0bn worth projects comprising developments at Kwasa Sentral, PJ Sentral and KL Sentral. Unbilled sales amounts to RM1.0bn representing 1.6x cover on FY20 property revenue. 1QFY21 sales achieved came in at RM52m (2/3rd from 1060 Carnegie), on pace to match FY20 figures. To match last year’s performance, domestic sales would have to come in at RM136m (vs RM165m last year) which remains achievable

Forecast. Cut FY21/22/23 forecasts by -10.2%/-3.4%/-2.1% after cutting billing assumptions.

Maintain HOLD, TP: RM0.41. Maintain HOLD with a slightly lower SOP-driven TP of RM0.41 post-earnings adjustment. Our TP implies a FY21-23 P/E multiple of 86.1x/37.3x/30.3x. Despite poor share price performance of late, we believe political fluidity coupled with limited upside catalysts on the horizon could pose a continued drag on near term performance while its low P/B trading multiple of 0.34x might cushion further downside. Key upside catalysts: MRT3 rollout; Downside risks: extended phase 1 and political uncertainties.

Source: Hong Leong Investment Bank Research - 13 Aug 2021