Results

• Result below expectation. MGB Berhad (MGB) posted 2Q21 net profit of RM4.3m, which soared 975.0% yoy but tumbled 57.4% qoq. For 1H21, the Group achieved RM14.4m net profit, +396.6% yoy, which accounts for 41% of our full year net earnings estimate. The weaker-than-expected result is mainly due to lackluster showing of this quarter as impacted by Full Movement Control Order (FMCO) in June this year as construction progress and business activities were halted.

Comment

• Stronger yoy performance due to low base effect underpinned by Construction segment. MGB registered better yoy result mainly driven by its strong showing of Construction segment as segmental revenue soared 130.4% yoy while segmental bottom line returned to PBT of RM7.2m from a loss before tax of RM1.3m. The improvement of result was due to the relaxation of movement restrictions in 2021 whereas Movement Control Order (MCO) 1.0 implemented from 18 March 2020 to 9 June 2020 had completely halted the operation of the Group for approximately 1.5 months in 2Q20. On the other hand, we witness the sluggish performance posted by its Property Development during this quarter with its segmental revenue and PBT slid -80.0% yoy and -94.4% yoy respectively, were mainly attributable to timing difference of project recognition. The delivery of vacant possession of Zenopy Residences in Dec 20 and Laman Bayu Phase 1 in Mar 21. Similarly, the longer working periods that allowed to operate under movement restriction control during 1H21 as compared to 1H20 coupled with reversal of over-accrued project costs and recognition of savings arising from costs sharing with subcontractors also yielded better yoy result.

• FMCO weighed on qoq result. Lower qoq performance of the Group was mainly attributable to weaker contributions from its Construction (top line: -20.1% qoq, bottom line: -44.6% qoq) and Property Development (top line: -82.5% qoq, bottom line: -92.9% qoq). As mentioned earlier, the implementation of FMCO in June 21 adversely affected the Group’s construction progress and business amid fixed operating costs incurred.

• Anticipating better 2H. With the relaxation of movement restriction, we envisage MGB to deliver stronger 2H driven by higher working progress for its Construction segment as well as its Property Development - handover of the vacant possession of Laman Bayu Phase 2 at Bandar Putera Indah in 3Q. Furthermore, new launch of Laman Bayu Phase 3 (118 units of affordable landed residences in Batu Pahat, Johor with a total GDV of RM45m) is expected to further boost 2H earnings. We understand that the response for the Phase 3 was overwhelming with 60 units being booked out of 62 units that opened for registration thus far.

• Healthy outstanding orderbook and unbilled sales. As of end-July 21, MGB boasts RM1.9b of outstanding construction orderbook and property unbilled sales of RM20.8m which will underpin its earnings visibility for the next 2-3 years. Meanwhile, the Group’s current tender book is c.RM1b, mainly stemming from government projects (infrastructure works and government buildings).

• Launch of Rumah Selangorku Idaman (RSI) projects by end of this year. Amid current economic uncertainty, the Group will focus on its core objective in constructing and developing affordable housings in Klang Valley. We understand that MGB targets to launch all of its 6 RSI projects which are strategically located in Klang Valley by end of this year with soft launch is tentatively scheduled in Sept. Meanwhile, the Group has completed its factory upgrade for Industrialised Building Sistem (IBS) precast plants in Alam Perdana and Nilai. After all, MGB has a capacity to produce up to 6,000 units of affordable housings per year. This enables the Group to enjoy cost advantage in constructing RSI projects.

Earnings Outlook/Revision

• No change to our net earnings forecasts of RM34.7m for 2021 and RM66.2m for 2022 as we opine that the Group would catch up on construction progress in 2H.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM1.15. Our target price is derived by ascribing a 10x PER to the Group’s 2022F diluted EPS (after conversion of 90m ICPS). This is in line with other mid and small-cap construction and property companies which are currently trading at 7-10x forward PE.

• We favour the stock for: 1) Benefiting from the affordable residential market segment which is relatively unfazed by the prevailing supply-demand imbalance; 2) Serving a niche market with high entry barrier as the Group commands cost advantage in constructing affordable housings, mainly leveraging on its expertise and scale in IBS; 3) Sizeable construction outstanding order book of RM1.9b as well as a whopping RM1.1b RSI worth of property launches targeted in 2H21 onwards; 4) Earnings are back to growth trajectory as the Group is expected to attain 2021F and 2022F bottom line growths of 147.6% and 90.9% yoy on the back of its top line growths of 44.6% and 53.0% yoy respectively; and 5) Backed by an established major shareholder, LBS Bina Group Berhad with expected continuous orderbook replenishment as well as chances of tapping into LBS’ strength and resources.

Source: JF Apex Securities Research - 30 Aug 2021