MRCB’s 1QFY21 core PATAMI of RM14.0m were within our but beat consensus expectations at 25%/41% of forecasts. Management is guiding for gradual sequential improvement going forward. Having secured the flood mitigation project, there could be wins from WTE project and MRT3 going forward. We consider MRCB to be a strong contender for MRT3 civil packages being the largest listed Bumi contractor. Assets around RM500-600m have been earmarked for potential disposal (no timeline). Increase FY22/23/24 earnings by 9.8%/1.5%/3.6%. Maintain our trading oriented BUY rating with higher SOP driven TP of RM0.46. Its low P/B trading multiple of 0.36 (bottom 10% based on 5 year trading range) presents an attractive risk reward, in our view.

Within expectations. MRCB reported 1QFY22 results with revenue of RM810.7m (- 5.5% QoQ, 257.6% YoY) and core PATAMI of RM14.0m (vs core LATAMI of -RM33.7m in 4QFY21; 169.8% YoY). Results came in within our but beat consensus expectations at 25% and 41% of full year forecasts. No EIs was accounted for in the quarter.

Dividends. No DPS was declared (normally declared in 4Q).

QoQ. Performance returned to the black buoyed by much improved contributions from all segments. While group revenue fell by -5.5%, mainly dragged by slightly lower LRT3 recognition at the start of the year, EBIT margins recovered by 4.7ppts driven by blanket improvement across all segments. We reckon the higher contribution on the property side in part led to this margin accretion mix.

YoY. MRCB’s core PATAMI improved by 2.7x with revenue increasing by 3.6x. We see 1QFY21 as a low base given that the quarter was plagued by MCO2.0. The YoY improvement is mainly construction and property led with the former boosted by the consolidation of LRT3 project.

Construction. MRCB’s outstanding orderbook stands at RM18.9bn which is roughly 21.0x cover on FY21 construction revenue. The company recently received an LOA for Muara Sg. Pahang Phase 3 flood mitigation project worth RM380m. The project carries a “low double digit” margin with an execution period of 4-5 years. Tenderbook has depleted to RM35m post-award conversion of the aforementioned project. Tenders will likely increase with MRT3 tender briefing to be held soon (submission deadline: 30 Aug). We continue to see MRCB as a strong contender for the elevated packages as they are reserved for domestic only participation with 50% minimum Bumiputera participation in the JV-co (minimum effective stake: 31%). There has also been progress on MRCB’s sizable WTE project, with service agreement to be formalised. The project will carry orderbook replenishment opportunity which is timely while waiting for MRT3 awards.

Property. Unbilled sales are roughly unchanged amounting to RM818m representing 1.6x cover on FY21 property revenue. Sales for 1QFY22 came in at only RM23m, nonetheless, management has indicated that sales momentum in April and May is far stronger and we think is still on track vs. our full year projections. Total launches for FY22 could come to RM1.7bn with ~RM900m coming from its Australian project. The rest would come from its soon to be launch integrated logistics hub development in Simpang Pulai, Kwasa and PJ Sentral. The Simpang Pulai project is located next to the NSE, stretches 683 acres and carries a potential GDV in excess of RM1bn. In a new development, the company has also earmarked Ascott Sentral and Menara Celcom as potential monetisation opportunities which would net the company RM500- 600m.

Forecast. Increase FY22/23/24 earnings by 9.8%/1.5%/3.6%.

Maintain BUY, TP: RM0.46. Maintain our trading oriented BUY rating with higher SOP-driven TP of RM0.46 post-earnings adjustments and rolling forward base to mid FY22. We see MRCB as a MRT3 laggard play considering its weaker share price performance vs. peers. Its low P/B trading multiple of 0.36 (bottom 10% based on 5 year trading range) presents an attractive risk reward, in our view. Key upside catalysts: contract wins; Downside risks: margins, execution, property sales slowdown and political uncertainties.

Source: Hong Leong Investment Bank Research - 1 Jun 2022