• Malaysian Resources Corp (MRCB) saw a surprise net loss of RM204m in 6M20, mainly due to impairment of construction contract receivables of RM197m.
• Its construction and property development operations were also disrupted by the government’s Movement Control Order (MCO).
• We downgrade our 2020E forecast to a net loss of RM177m to reflect the impairment. Maintain our SELL call with RM0.43 target price, based on 50% discount to RNAV.

Surprise Loss

MRCB reported net loss of RM204m in 6M20 compared to consensus full-year net profit forecast of RM43m and our previous estimate of RM20m. The main reason was the impairment of construction contract receivables of RM197m in 2Q20 related to completed projects in the hospitality industry, which is adversely impacted by the Covid-19 pandemic. Revenue increased 25% yoy to RM593m in 6M20 due to higher property development revenue (+115% yoy), partly offset by lower construction (-18% yoy) and building services (-14% yoy) revenue. Core net loss was RM7m in 6M20 compared to RM40m in 6M19 as its core property development division saw a turnaround.

Lifted by Australian Property Project

Revenue recognition for its completed 1060 Carnegie project (82% sold) in Melbourne was the key driver for the 115% yoy jump in property development revenue. MRCB achieved property sales of RM86m in 6M20. But the MCO adversely impacted the progress billings for its domestic property development and construction projects. Property earnings fell 52% yoy to RM23m in 6M20 due to the absence of RM58m oneoff gain recognised for the sale of its 30% stake in One IFC in 6M19. Construction earnings (excluding impairment) declined 15% to RM2m in 6M20 on lower revenue (-18% yoy). Its joint-venture Light Rail Transit Line 3 (LRT3) project contributed RM1.4m earnings in 6M20 compared to RM1.0m in 6M19. Its remaining order book of RM20.7bn and unbilled property sales of RM1.3bn will support earnings in 2020-2022E.

Earnings Forecast Risks Remain High

We believe earnings forecast risks remain high for MRCB due to the challenging property market conditions. We maintain our core earnings forecasts but now assume a net loss of RM177m in 2020E compared to RM20m previously to factor in the RM197m impairment of construction contract receivables. We reiterate our SELL call with RM0.43 target price, based on 50% discount to RNAV. Key upside risks are higher-than-expected progress billings and profit margins for its ongoing construction and property development projects.

Source: Affin Hwang Research - 28 Aug 2020