MRCB’s 1Q17 result was disappointing. Net profit of RM10m (+139% yoy) in 1Q17 was only 7% of consensus and our full-year forecasts of RM144-153m. The construction and property development earnings were below our expectation. We slash our EPS forecasts by 15-39% in FY17-19E. We also cut our TP to RM1.47 from RM1.85 (based on the same 20% discount to RNAV) following downward revision to our RNAV. The proposed 1-for-1 rights issue of new shares with free detachable warrants will remain a share overhang. HOLD.

Below Expectation

Revenue was up 20% yoy to RM525m, driven by higher progress billings for construction and property development divisions. But revenue declined 49% qoq in 1Q17 due to the absence of land sale to MRT Corp in 4Q16 and high progress billings for completed units of Sentral Residences. PBT fell 88% qoq due to lower one-off gains from asset disposals of RM1.6m in 1Q17 compared to RM201m (gains from sale of land and Menara Shell) in 4Q16. Excluding the one-off gains, PBT fell 26% qoq to RM27.7m in 1Q17 due to lower construction and property earnings.

Weak Construction Earnings

Construction operating profit fell 21% qoq to RM1.3m in 1Q17 due to lower progress billings as certain projects were completed. Profit margin remained low at 0.5% in 1Q17 compared to 0.4% in 4Q16 due to lowmargin legacy projects. Its new projects with better margins such as LRT3 and Kwasa Damansara have not started to contribute to earnings.

Good Property Sales

MRCB achieved property sales of RM513m in 1Q17 with the maiden launches for the Sentral Suites (Tower 1 and 3) and Kalista, Bukit Rahman Putra projects and maintains target sales of RM1.2bn for FY17. We revise our RNAV/share down to RM1.84 from RM2.30 to reflect the higher net debt and lower property development and construction valuation. Net debt increased in 1Q17 as MRCB drew down loans to finance the Bukit Jalil Stadium refurbishment project.

Still a HOLD

Maintain HOLD with lowered TP of RM1.47, based on 20% discount to RNAV. Key risk is slower property sales and weak construction margin.

Source: Affin Hwang Research - 30 May 2017