Challenging Conditions Remain

•  MRCB’s 9M20 results were below market and our expectations as it is seeing a slow earnings recovery despite the easing of the Movement Control Order (MCO) and the resumption of construction activities since June.
• MRCB incurred a lower core net loss of RM0.5m in 9M20, compared to RM37.3m in 9M19. We cut core net profit to RM7.6m in 2020E from RM20.4m previously to reflect a higher tax expense.
• We expect MRCB to see a slow earnings recovery due to disruptions caused by the current Covid-19 pandemic. Maintain our SELL call and TP of RM0.43.

Remained in the Red

MRCB reported a headline net loss of RM203m in 9M20, mainly due to the RM202.5m of impairments recognised in 2Q20. Core net loss was reduced to RM0.5m in 9M20 as it posted a core net profit of RM0.9m in 3Q20. But the recovery still lags the consensus fullyear net profit forecast of RM31.6m and our previous estimate of RM20.4m. Revenue increased 5% yoy to RM890.6m in 9M20 on the back of higher property development revenue (+32% yoy). Its construction (-14% yoy) and building services (-15% yoy) divisions saw lower revenue in 9M20 due to the adverse impact of the MCO. EBITDA margin improved to 9.0% in 9M20, compared to 4.6% in 9M19. Coupled with lower net interest expense, the company turned around to post core PBT of RM15m in 9M20, compared to a core pre-tax loss of RM25.5m in 9M19.

Slow Property Sales and Construction Progress Billings

MRCB achieved property sales of RM126m in 9M20, compared to RM398m in 9M19. The Covid-19 pandemic affected sales in Malaysia due to the temporary closure of property showrooms during the MCO and weak market sentiment. Slower progress billings for some construction projects such as LRT Line 3 (LRT3) and SUKE led to lower construction revenue in 9M20. High unbilled property sales of RM1.2bn and remaining order book of RM20.5bn will support its core operations. But key risk is project execution.

Maintain Our SELL Call

There were disruptions caused by Covid-19 infections among some workers at its property construction sites affecting work progress. An accident at a section of SUKE led to a temporary closure for investigation, which led to MRCB and its subcontractor being fined RM180k by the authorities in 4Q20. We believe earnings forecast risk remains high for MRCB. We reiterate our SELL call and target price of RM0.43, based on a 40% discount to RNAV. Key upside risks are the acceleration of the Kwasa Damansara development that potentially benefits MRCB, and faster progress billings for ongoing projects.

Source: Affin Hwang Research - 24 Nov 2020