• Malaysian Resources Corp (MRC) saw core earnings rise to RM7.1m in 4Q20 from RM0.9m in 3Q20, driven by higher progress billings for its construction and property projects, and lumpy overseas property revenue recognition
• We maintain 2021E core EPS but cut 2022E by 12% to reflect lower property development profit margin. Prospects remain challenging due to the weak property market and periodic disruption in construction works
• We upgrade our call on MRC to HOLD from Sell as the share price has fallen below our new target price (TP). We lift our 12-month target price (TP) to RM0.45, based on an unchanged 50% discount to upgraded RNAV

Results Were Below Expectations

Core net profit of RM7.1m in 4Q20 was insufficient to offset the earlier losses and MRC posted a core net loss of RM0.3m in 2020. This was below market and our expectations considering consensus and our core net profit forecasts of RM5.7-7.6m. Revenue fell 9% yoy to RM1.2bn as progress billings for its construction and property development projects were affected by Covid-19 infections at certain sites and the Movement Control Order. The completion of MyIPO office tower in PJ Sentral Garden City on 13 November 2020 and 1060 Carnegic project in Melbourne lifted revenue by 12% yoy in 4Q20.

Substantial Headline Net Loss

MRC posted a net loss of RM176.1m in 2020E, mainly due to the impairment of construction contract assets and trade receivables. However, there was a RM27.2m write-back of impairments in 4Q20, reducing the net figure to RM170.2m in 2020. Its property division achieved sales of RM187m in 2020, a 65% yoy decline from RM537m in 2019. But unbilled sales remain high at RM1.6bn, which will support property development earnings in 2021-23E. Property PBT margin fell to 7.4% in 2020 from 13.6% in 2019 as some projects such as Sentral Suites were at early stages of completion.

Upgrade to HOLD Following Share Price Correction

We believe MRC will see a gradual earnings recovery in 2021E due to the challenging property market conditions and most of its property products are upmarket condominiums. It has set a sales target of RM600m for 2021 with new launches in KL Sentral, PJ Sentral and Kwasa Sentral. The expected acceleration in progress billings for its construction and property projects as the pandemic lockdown restrictions ease will support the earnings recovery. MRC has submitted tenders worth RM2.7bn as at end-2020 for new construction contracts with a high remaining order book of RM20.5bn, comprising mainly long-term projects. We upgrade our call to HOLD with potential upside of 8% to our lifted 12-month TP of RM0.45, based on a 50% discount to RNAV.

Source: Affin Hwang Research - 1 Mar 2021