MRCB’s 1HFY21 core loss of -RM27m were below our and consensus expectations caused by slow billings and weak margins. Management anticipates a pick-up in productivity levels in the coming months but path to normality is gradual with lingering supply chain issues. The company could secure a flood mitigation project worth RM300-400m by year end. Property sales are on track to match last year’s and would centre largely on ongoing projects with launches delayed. Slash FY21/22/23 earnings by -62.8/-9.8/-10.5%. Maintain HOLD with unchanged TP of RM0.41. The stock lacks upside catalysts and weak execution may pose a continued drag on near term performance while its low P/B trading multiple of 0.39x might cushion further downside.

Below expectations. MRCB reported 2QFY21 results with revenue of RM225.7m (- 0.4% QoQ, 35.0% YoY) and core loss of -RM32.4m (vs core earnings of RM5.2m in 1QFY21; core loss of -RM17.1m in 2QFY20). This brings 1HFY21 to core loss of - RM27.2m. We deem the results below our and consensus expectations (we projected FY21 core earnings of RM21.1m; while consensus projected core earnings of RM20.8m).

Deviations. Both slow billings and weak margins resulted in results shortfall.

Dividends. No DPS was declared during the quarter. Dividends are typically declared in 4Q.

QoQ. 2QFY21 performance fell back into losses dragged by weaker margins on both construction and property segments on the back of lower productivity and higher cost pressure. Consequently, at the EBIT level, property profits declined by -74.5% while construction saw losses widening 19-fold. This was despite recording flattish revenue propped up by financial settlements for 35 units of its 1060 Carnegie project (vs 7 units achieved in 1QFY21). Settlements should slow in 3QFY21 with lockdowns in Melbourne as Australia strives for a “zero Covid” strategy.

YoY. Core loss widened by almost 2-fold despite achieving a higher revenue run rate due to weaker margins from material costs pressure, various SOP related costs and suboptimal phase of recognition for its projects.

YTD. Core loss widened to -RM27.2m in 1HFY21 from marginal loss in 1HFY20 brought about by revenue declines on both construction (-32%) and property (-18%) segments. In 1HFY21, its construction division was hampered by persistent site closures and operating days lost while its property division in addition to the aforementioned, recognised less units settled from its 1060 Carnegie project (1HFY21: 42 units; 1HFY20: 79 units)

Construction. MRCB’s outstanding orderbook stands at c.RM15bn (ex-LRT3; equity accounted), translating to a sizable c.30x cover on FY20 construction revenue (inflated by slow 2020 billings) which are comprised of long term projects. Management anticipates a pick-up in productivity levels in the coming months as more workers are vaccinated. Nonetheless, execution could remain weak hampered by various supply chain issues such as labour and materials shortage. On tenders, MRCB maintains a RM2.1bn tenderbook (75% building/complexes), and is looking to secure a c.RM300-400m flood mitigation project. We reckon given the recent flooding events, there is a realistic chance of this materialising.

Property. Unbilled sales amounts to RM979m representing 1.6x cover on FY20 property revenue. 1HFY21 sales achieved came in at RM107m (62% from 1060 Carnegie), on track to meet our expectations of RM200m for the year. Management is delaying its launches at KL and PJ Sentral which carries GDV of RM750m, by our estimates. We are expecting lacklustre segmental performance as settlements from 1060 Carnegie could decelerate going forward.

Forecast. Slash FY21/22/23 earnings by -62.8/-9.8/-10.5% after toning down billings and margin assumptions.

Maintain HOLD, TP: RM0.41. Maintain HOLD with an unchanged SOP-driven TP of RM0.41. Our TP implies a FY22-23 P/E multiple of 40.1x/33.3x. The stock lacks
upside catalysts and weak execution may pose a continued drag on near term performance while its low P/B trading multiple of 0.39x might cushion further downside. Key upside catalysts: MRT3 rollout; Downside risks: Covid-19 setbacks and political uncertainties.

Source: Hong Leong Investment Bank Research - 1 Sept 2021