Period  3Q13/9M13

Actual vs. Expectations MRCB’s core net loss of RM56.0m in 9MFY13 came in as a surprise. The negative variance was due to the unexpected construction division losses following the huge provisions made in the segment. The core net loss is after excluding its one-off fair value adjustment of Lot G office towers amounting RM55.4m.

Dividends  None. Highly likely there will be no dividend to be declared in FY13.

Key Results Highlights Losses mainly dragged down by construction. MRCB registered a core net loss of RM67.0m in 3Q13 mainly due to the construction division loss. The management has taken a prudent approach by booking in huge provisions of RM108m for the segment.

 Big chunk of the provisions (RM68.5m) are mainly from the KL Sentral Lot G retail mall and offices projects as there are:

(i) un-finalised variation orders claims and (ii) potential Liquidated Ascertain Damages (LAD) costs following jobs delivery delay. Meanwhile, the remainder RM40m provisions was made for various projects namely EDL, Kelana Jaya LRT and other KL sentral projects.

 YTD, MRCB registered a net loss of RM56.0m in 9M13 as compared to a net profit of RM41.1m in 9M12 due to the abovementioned reasons. We reckon even if earnings were to rebound next year, it still could not cover the severe losses incurred in 3Q13. The management also mentioned that these provisions are not permanent as it could potentially be written back in the foreseeable future.

Outlook  We attended MRCB’s Analyst Briefing last week and came away from the briefing feeling Neutral to Positive due to the following takes: (i) the management’s effort to clean up the books and focus on business improvement, (ii) the management’s turnaround plans moving forward, (iii) progress on the resolution of the “EDL limbo” whereby the government hinted to start tolling back the highway as agreed originally, (iv) rationalisation of its construction arms (i.e. Gelanggang Harapan and MRCB Construction), and (v) further non-core assets disposal (i.e. Platinum Plaza, 30%-owned DUKE, MRCB Tech) is in the pipeline which has already commenced (i.e. disposal of GTC Global) to improve its cash flow.

Change to Forecasts While we are maintaining our FY14 earnings forecasts, we slashed our FY13 net profit forecasts and are forecasting a net loss of RM36.7m to reflect its construction division losses.

Rating Maintain MARKET PERFORM

 While we like the fact that the new management laid out its turnaround plan, we will re-rate MRCB only after its near-term catalysts crystallise (i.e. secured infra jobs from KTMB, EDL highway tolling resolution, PJ Sentral court tussle resolve, higherthan-expected property earnings)

Valuation  RNAV-based Target Price tweaked lower to RM1.40 from RM1.59 after: (i) we change construction’s division target PER to 7x from 12x to reflect its unexpected losses in the segment, (ii) we imputed 10% discount to our RNAV-based to reflect delay in its near-term catalysts.

Risks to Our Call  Negative outcome of PKNS-NGD court tussle.

 Further delays of the EDL highway resolution.

 Delays in construction projects.

 Rising building materials prices.

 Lower-than-expected property sales.

Source: Kenanga