MRCB’s 1H17 result was below expectations. Net profit of RM33.8m (- 32% yoy) in 1H17 was only 27% of consensus full-year forecast of RM126.7m and 42% of our previous full-year estimate of RM81.4m. Slower-than-expected progress billings for its property development sales surprised us. We cut FY17-18E EPS by 16-26% but lift FY19E EPS by 19%. We also cut our TP to RM1.24 from RM1.47 after cutting our RNAV estimate (TP is based on 20% discount to RNAV). The proposed 1-for-1 rights issue of new shares with free detachable warrants will remain a share overhang. Maintain HOLD.

Below Expectations

Revenue jumped 55% yoy to RM1.28bn in 1H17, driven by higher progress billings for construction (+110% yoy) and property development (+29% yoy) divisions. The surge in construction revenue was due to the fast-track implementation of the National Stadium project (completed in 3Q17). Core PAT jumped 76% yoy to RM28.4m due to the high operating leverage of its businesses. EBITDA margin contracted 3.5ppt to 8.7% in 1H17 due to the higher operating costs (+61% yoy). Net profit contracted 32% yoy due to lower one-off gains of RM5.4m (gain from sale of non-core subsidiaries) in 1H17 compared to RM44.4m (gain from sale Sooka Sentral and stake in a joint venture company) in 1H16.

Surge in Construction Earnings

Construction operating profit jumped more than 4-fold to RM15.3m in 1H17 due to higher progress billings and higher margin of 2.2% in 1H17 compared to 0.9% in 1H16. Its new projects with better margins such as LRT3 and Kwasa Damansara have not started to contribute to earnings.

Reduced TP to RM1.24

MRCB achieved property sales of RM942m in 1H17 with the maiden launches for the Sentral Suites (Tower 1-3) and Kalista, Bukit Rahman Putra projects. It is on track to meet target sales of RM1.2bn in FY17. We revise down our fully-diluted RNAV/share to RM1.78 from RM1.84 to reflect the higher net debt, lower property development valuation and rolling over our DCF base year to FY18E. Maintain HOLD call with a lower TP of RM1.24 (assuming the out-of-money warrants expiring on 16 September 2018 will not be converted). Key upside/downside risks are stronger/weaker property sales and higher/lower construction margin.

Source: Affin Hwang Research - 30 Aug 2017