Results

• Results below expectation. MGB Berhad (MGB) posted 1Q22 net profit of RM7.1m, which tumbled 29.7% yoy and 32.4% qoq. Revenue wise, the Group achieved 1Q22 top line of RM178.6m, up 6.6% yoy but down 5.3% qoq. The result is below our expectation as it accounts for merely 13% of our full year net earnings estimate. This is mainly due to lower-than-expected progress billings coupled with weaker profit margin.

Comment

• Weaker yoy and qoq results. The lower yoy and qoq performance was across the board, bogged down by its Construction division (segmental PBT: -16.2% yoy and - 13.5% qoq) and Property Development division (segmental PBT: -50.0% yoy and -77.4% qoq). The rising cost of building materials weighed on the margin whilst shortage of foreign workers affected the construction progress of the on-going projects. Also, the timing differences of profit recognition on property development projects exacerbated the slide in earnings.

• Healthy orderbook amid margin erosion. As of April 22, MGB boasted an outstanding construction orderbook of RM1.7b which underpinned its earnings visibility for the next 2 years. However, we envisage the Group to face headwinds as project margin could be affected by rising cost of material and minimum wages on top of the shortage of foreign labour which would negatively impact the construction progress of its existing projects.

• Overwhelming response on recent property launches. The newly launched project of Laman Bayu Phase 3 and Phase 4 with total 118 units of double storey terraces have registered total new sales of RM18.3m with 47 units sold. The project is currently at its piling and earthwork construction stage. Meanwhile, Idaman BSP has received 100% booking and in the midst of converting into sales. As of April 22, the Group has an unbilled sales of RM24m.

• A slew of affordable property projects in the pipeline. MGB plans to launch its Zenit Molek, Johor in Sept this year with an estimated GDV of RM367m. In addition, the Group also targets to launch its Rumah Selangorku Idaman (RSI) projects such as Idaman Melur in July, Idaman Cahaya in August and Idaman Sari in November this year, all are strategically located in the Klang Valley.

Earnings Outlook/Revision

• We slash our 2022F and 2023F net earnings forecasts by respective 41.2% and 48.9% to RM32.1m and RM43.2m after lowering our progress billings on current construction projects, slower profit recognition of RSI projects on the back of late launches in this year as well as our lower margin assumptions.

Valuation & Recommendation

• Maintain BUY with a lower target price of RM0.72 (from RM1.05) following our earnings cut. Our revised target price is now derived by ascribing 12.5x PE multiple to the Group’s 2022F diluted EPS (conversion of 90m ICPS) which is in line with its +1SD above 5-year historical mean 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; and 3) Backed by an established major shareholder, LBS Bina Group Berhad with expected continuous orderbook replenishment as well as chances of tapping into its parent company’s strength and resources.

Source: JF Apex Securities Research - 18 May 2022