MRCB reported a surprise core net loss of RM44m in 2Q19 (core net loss of RM40m in 6M19). Its construction division incurred losses while its property arm saw slow progress billings and sales. But an exceptional gain of RM55m from the disposal of its 30% stake in St Regis Hotel recognised in 2Q19 lifted its net profit to RM15m in 6M19. We cut our core 2019-21 EPS forecasts by 61-66% to reflect lower construction and property earnings, but reiterate our HOLD call with a lower target price of RM0.74, based on a 40% discount to RNAV.

Surprise Loss

Net profit of RM15m (-72% yoy) in 6M19 was only 11-16% of market consensus and our previous 2019 forecast of RM94-137m. We were surprised by the low property earnings and JV income. Revenue fell 43% yoy to RM475m in 6M19, mainly due to slow progress billings for its property development division. The Klang Valley LRT Line 3 (LRT3) project contributed PAT of RM1m in 6M19 compared to RM15m in 6M18 to JV income due to work delays caused by the re-modelling of the project to reduce costs. Both its construction and property divisions incurred operating losses due to slow progress billings and high operating costs.

Weak Property Sales

MRCB achieved pre-sales of RM244m in 6M19 (compared to RM75m in 1Q19), mainly from its Sentral Suites and TRIA condominium, 9 Seputeh, projects. There are property bookings worth RM130-140m pending the signing of Sales and Purchase Agreements (SPA). MRCB launched the Alstonia Hilltop projects with gross development value (GDV) of RM247m with an initial take-up rate of 8%. It delayed further launches of new property projects as market sentiment remained weak. Unbilled sales of RM1.8bn will likely shore up its property earnings as progress billings accelerate in 2H19.

Still a HOLD

MRCB sold its 30% stake in the St Regis Hotel and Residences project to CMY Capital for RM117.3m on 23 May 2019. The net disposal gain of about RM55m boosted its earnings in 2Q19. We cut our RNAV/share estimate to RM1.23 from RM1.50 to reflect the higher net debt, lower property development DCF and lower construction arm valuation. Based on the same 40% discount to TP, we cut our TP to RM0.74 from RM0.90, but reiterate our HOLD call on valuation. Key upside/downside risks are stronger/weaker property sales and progress billings.

Source: Affin Hwang Research - 26 Aug 2019