We continue to broadly expect earnings recovery in FY22 with 2H to improve from low base in 2HFY21. Outstanding order book stands at RM4bn (cover: 3.5x) with no jobs secured so far in 2022. Labour costs have met steep increases due to shortage. Tenders mainly consist of PBH Sabah and MRT3 jobs. Property segment should remain in losses in FY22 and turnaround could be further delayed as launches are negligible this year. There are further headwinds ahead from rate hikes, erosion of purchasing power and subsidy rationalisation impact on sentiment. Property investment division is gradually normalising with improvements expected in coming quarters. Maintain forecasts. Maintain HOLD with SOP-driven TP of RM0.50. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution, capital intensive ventures and rate hikes.

Below Are the Key Takeaways From Yesterday’s Briefing:

Construction. Orderbook stands at ~RM4bn (3.5x cover). Its construction division has normalised operations from a burn rate standpoint. For 2QFY22, top-line improved by 56.5% QoQ but EBIT was only better off by 3.2% as margins dived on the back of various costs inflation (EBIT margin: -1.7 ppts). We gather that apart from materials prices contributing to margin pressure, there was a 40-60% increase in general worker day rates (vs pre-shortage). While some materials have peaked, given the labour situation we think margins could remain thin. WCT has not been met with shortages at its larger project sites as we believe wage rates are above market. Nevertheless, its KB airport project has been hit by shortages requiring EOTs. Tenderbook of RM9bn consists of MRT3 (CMC301) and PBH Sabah jobs amongst others. With net gearing at 1.1x (perps as debt), we reckon a subcontractor participation is less risky.

Property development. Unbilled sales have increased to RM335m. Sales for 1HFY22 came in at RM266m lagging behind management’s target of RM600m (reduced from RM1bn). Sales are on track vs our expectations of RM500m. 2QFY22 PBT was at - RM19m due to lack of land sale gain and sales coming mostly from completed heavily marked down units. Division should remain in losses as remaining land bank (earmarked for sale) looks to be slow moving, in our view. Management’s earlier expectations of a bottom-line turnaround in FY23 could also be delayed further as launch target this year has downsized considerably from RM2.81bn target early this year. For FY22, launches will only be Adenia (RM68m; affordable housing). Delays are due to heightened market uncertainty caused by rate hikes, materials and labour shortages. We expect the 2H to be tougher due to further hikes, erosion of spending power and potential subsidy rationalisation impact on sentiment.

Property investment. Occupancy rates are broadly stable in 2QFY22 with gradual improvements seen at gateway@klia2 and Paradigm JB. Both have benefitted from ramp up in international travel and looser border restrictions. We continue to expect further improvements in this segment moving forward.

Forecast. Maintained.

Maintain HOLD, TP: RM0.50. Maintain HOLD with unchanged TP of RM0.50 based on an unchanged 30% discount to SOP value of RM0.72. We have previously de-rated the target P/E multiple tagged to subsidiary earnings to 9x (from 12x) to be more in-line with smaller cap construction peers. The stock currently trades at FY22/23/24 P/E multiple of 13.4x/8.2x/5.2x. Catalysts: contract wins and strong property sales. Downside risks: margins, project execution, capital intensive ventures and rate hikes.

Source: Hong Leong Investment Bank Research - 2 Sept 2022