MRCB’s 1HFY22 core PATAMI of RM14.5m (SPLY: -RM27.2m) was below expectations at 24%/23% of our/consensus forecasts due to high effective tax rates. Labour woes are starting to impact execution of its projects. Nonetheless, our forecasts have factored this in. Post-flood mitigation award, there could be wins from WTE project, Shah Alam job, expanded scope in LRT3 and MRT3 jobs going forward. We consider MRCB to be a strong contender for MRT3 subcontracts being a key player in railway infrastructure. Cut FY22/23/24 earnings by -24.2%/-4.6%/-4.5%. Maintain our trading-oriented BUY rating with lower SOP-driven TP of RM0.44. Its low P/B trading multiple of 0.35 (bottom 10% based on 5 year trading range) presents an attractive risk reward, in our view.
Below expectations. MRCB reported 2QFY22 results with revenue of RM700.4m (-13.6% QoQ, +210.3% YoY) and core PATAMI of RM0.4m (-97.0% QoQ; vs core LATAMI of -RM32.4m in 2QFY22). This brings 1HFY22 core PATAMI to RM14.5m (vs core LATAMI of -RM27.2m in 1HFY21). We consider the results below our/consensus expectations at 24%/23% of full year forecasts. The miss was driven by higher-than-expected effective tax rates. We have adjusted 2QFY22/1HFY22 earnings for RM18m SIDEC land injection gain on an after tax basis (24%). No adjustments made for 2QFY21/1HFY21 earnings.
Dividends. No DPS was declared (normally declared in 4Q).
QoQ. Core PATAMI declined -97.0% (adjusted for the above land gain) due to weaker contribution from its property segment (Revenue: -22.1% QoQ; EBIT: -80.4% QoQ). The segment was partly impacted by sales cancellation amounting to RM33m (TRIA & Sentral Suites) resulting in differences in recognition timing as these sales were eventually replaced. Recognition is likely to materialise later in the year. MRCB also recorded RM165.1m sales of commercial units from VIVO which may be recognised toward the backend of FY22. Construction top-line declined -11.9% QoQ dragged by slower LRT3 progress with acute labour shortage impacting the project. We note that its physical progress for the LRT3 project has declined from 6% in 4QFY21 to 3% in 2QFY22. We think shortages could only start to ease in FY23.
YoY/YTD. Core PATAMI returned back to profitability on a YoY and YTD basis as 2QFY21 and 1HFY21 was severely impacted by various versions of MCO.
Construction. MRCB’s outstanding orderbook stands at RM18.4bn which is roughly 20.7x cover on FY21 construction revenue. In addition to the flood mitigation project (RM380m) awarded early in the year, MRCB is in the midst of finalising details of the refurbishment contract of Shah Alam complexes with the state government (reportedly worth >RM787m). This aside, the company is also trying to formalise its WTE project (TPC>RM1bn) and could possibly land a higher orderbook from LRT3 project through increased scope. We also anticipate possible contract wins from the upcoming MRT3 in early-2023. Turnkey tender submission deadline for the project has been delayed by roughly a month, coupled with possible elections this may delay awards. Separately, MRCB is in the midst of a legal challenge to recover its receivables written down in 2020 (~RM170m) which upon recovery, may boost headline profitability sometime in the future.
Property. Unbilled sales are roughly unchanged amounting to RM706.7m representing 1.6x cover on FY21 property revenue. Sales for 1HFY22 came in above expectations at RM250.1m (~RM227m in 2QFY22) driven primarily by aforementioned sales of commercial units at VIVO. Nonetheless, we keep our sales assumptions of RM400m unchanged as we reckon higher inflation and rate hikes could dent buyer sentiment. On notable launches, MRCB is only looking to launch Kwasa Plot F (RM325m) and SIDEC in 4QFY22. MRCB’s ~RM900m Australian project has been delayed into FY23, we think due to 125 bps rate hike done by RBA starting in May-22. Further delays to the above timeline may depend on future rate stabilisation.
Forecast. Cut FY22/23/24 earnings by -24.2%/-4.6%/-4.5% after increasing tax rate assumptions and imputing weaker margins.
Maintain BUY, TP: RM0.44. Maintain our trading oriented BUY rating with lower SOP-driven TP of RM0.44 (from RM0.46) post-earnings adjustments based on mid FY22 numbers. We see trading opportunities as contract news flow may accelerate going forward. Its low P/B trading multiple of 0.35 (bottom 10% based on 5 year trading range) presents an attractive risk reward in our view with most negatives priced in. Key upside catalysts: contract wins; Downside risks: margins, execution, property sales slowdown and political uncertainties.
Source: Hong Leong Investment Bank Research - 1 Sept 2022
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