Period  2Q13/1H13

Actual vs. Expectations  MRCB’s 1HFY13 net profit of RM11.0m came in below expectations, accounting for only 15% and 14% of our and consensus full year estimates respectively. The negative variance was due to slower-than-expected: (i) property sales recognition and; (ii) construction progress billings.

Dividends  No dividend declared in 2Q13.

Key Results Highlights  QoQ, despite weak revenue performance (-57% dragged by slower construction billings), 2Q13 net profit went up by 12% to RM5.8m thanks to slightly higher property margin. Property division’s EBIT margin increased to 24% from 21% mainly due to profit recognition on some completed projects with better margins.

 YoY, 2Q13 net profit climbed by 13% due to low base effect (i.e. 2Q12 was hit by the full charge out of the EDL project finance cost where the government was not started paying the interim payment yet).

 YTD, MRCB’s 1H13 net profit plunged 60% to RM11.0m, mainly due to lower revenue and margins. We understand that there are 2 major KL Sentral developments currently in the pipeline namely Q Sentral and Sentral Residences, which are currently still at the early stages of development. Based on our channel checks, these projects are at about 20% completion status and scheduled for 2015 completion.

Outlook  The court tussle between PKNS and Nusa Gapurna (“NGD”) on the PJ Sentral land is expected to be a long-drawn affair. Nonetheless, MRCB still can proceed with its corporate exercise to acquire the latter’s assets without the 70% PJ Sentral land.

 Re-rating catalysts for MRCB would be: (i) front runner as a master developer of the RM10b Kwasa Damansara (Sungai Buloh RRI), (ii) resolution of long-standing Eastern Dispersal Link (EDL) issues, (iii) potential new contracts of rail-infrastructure of >RM1.0b; and (iv) sale of another highway asset. We believe these developments will likely take place in the medium-long term rather than near term.

Change to Forecasts  We have revised lower our FY13 – FY14 earnings forecasts by 57%-38% as we have previously overestimated its construction and property earnings.

Rating   Downgrade to MARKET PERFORM

 We are downgrading MRCB to MARKET PERFORM (from OUTPERFORM previously) on the disappointing results and the absence of near-term catalysts. Nevertheless, we may re-look to upgrade the stock if: (i) the outcome of the PJ Sentral tussle between PKNS-NGD turned out to be positive and: (ii) any of the abovementioned re-rating catalysts materialized.

Valuation  Hence, we have revised our Target Price to RM1.59 from RM2.08 based on our RNAV-based valuation. Reduced TP is after construction earnings revision and excluding PJ Sentral valuation due to the PKNS-NGD court tussle.

Risks  Negative outcome of PKNS-NGD court tussle.

 Delays in construction projects.

Source: Kenanga