Period  1Q14

Actual vs. Expectations MRCB’s core earnings (continuing operations) of RM6.1m were below consensus expectations and ours. Its core earnings only make up 6.8% and 9.5% of consensus and ours full-year estimates, respectively. We believe that the disappointment was mainly due to lower-than-expected contribution from its construction division, which had been on a declining trend as the group shifts its focus to property development.

Dividends  No dividend was declared, as expected.

Key Results Highlights YoY, MRCB saw its 1Q14 core earnings grew by 18% YoY from RM5.2m to RM6.1m despite a slump in revenue (-22% YoY). The growth in earnings was mainly driven by higher contribution from its property division where revenue increase 109% YoY driven by its on-going property development projects in KL Sentral namely Lot B (Q Sentral office) and Lot D (The Sentral Residence) where construction works are currently in full swing.

 QoQ, its engineering division saw a recovery in earnings, registering an operational profit of RM5.4m versus RM22m losses in 4Q13. We believe that the recovery on its engineering division was driven by better cost controls and also partly due to the “kitchensinking” exercise undertaken by management last year. As for its property development division, its operational profit continues to grow by 78% albeit on lower revenue (-12% QoQ) which was driven by the improvements in margins that saw an increase of 11.6ppt to 22.8%.

Outlook  We believe that management’s turnaround plan is now showing results given the significant improvements in its construction and property development divisions, and we continue to hope to see more major developments in the pipeline that would enhance MRCB’s value, i.e. (i) disposal of EDL highway/commence tolling, (ii) injecting more property investments into REITS, and (iii) higher chances of orderbook replenishment on building and infrastructure projects.

Change to Forecasts We lowered our FY14-15E earnings estimates by 23%-17% to RM49.6m and RM81.6m, respectively as we delayed the recognition of our orderbook assumption and also reduced our construction margin assumptions.

Rating Maintain OUTPERFORM

 With the stock currently offering a potential upside of 52%, we believe that MRCB could be the “Dark Horse” of the year should its turnaround plan materialises. Hence, we are maintaining our OUTPERFORM rating for now.

Valuation  Following our revision in earnings, our Sum-of-Parts driven Target Price was lowered by 2.6% to RM2.27 (from RM2.33). (Please refer overleaf for more details.)

Risks to Our Call Delays in construction projects.

 Lower-than-expected orderbook replenishments.

Source: AmeSecurities