Period  4Q14/FY14

Actual vs. Expectations  FY14 core net profit for its continuing operations of RM41.6m was disappointing, as it makes up only 48% and 60% of our, and consensus, full-year estimates. The set of disappointing results was primarily due to higher-thanexpected financing costs coupled with an unexpected loss contribution from joint ventures.

Dividends  A first and final single tier dividend of 2.5 sen (net dividend yield of 1.8%), was proposed higher than our estimates of 1.2 sen.

Key Results Highlights  YoY, MRCB recorded core earnings of RM41.6m for FY14 vis-à-vis a core loss of RM54.6m in FY13. The reversal in earnings was backed by the growth in revenue (+61%) coupled with the expansion on its operating margin from 11% to 21% (+11ppt). The property division was the main driver of its revenue growth and margin expansion with revenue increasing by 89% to RM887.0m as a result of better billings from its development projects namely Q Sentral and Sentral Residences.

 QoQ, it registered core losses of RM13.5m in 4Q14 vis-àvis core net profit of RM26.0m in 3Q14. The main drag on its 4Q14 performance was due to higher financing cost (+13%), increase in taxation (+93%), and increase in losses from its joint ventures (+66%) due to the high startup cost arising from the opening of Nu Sentral.

Outlook  Moving forward, MRCB are planning to launch c.RM2.9b worth of development projects in FY15, consisting “affordable” range of residential product in Kajang (GDV: RM234m), mid-to-upper range apartments in Old Klang Road (GDV: RM1.4b), high-end residences near KLCC (GDV: RM387m), office buildings in Putrajaya (GDV: RM336m) and first phase of Penang Sentral (GDV: RM590m).

 It has a balance external construction orderbook of c.RM1.1b, coupled with c.RM1.7b property unbilled sales providing the group at least two years of earnings visibility.

 While management is targeting a net gearing level of 1.3x for FY15, we reckon that a cash call is imminent, as the group will be required to make payment soon for its 70% equity interest in the Special Purpose Vehicle with Kwasa Land for the development of project MX-1 amounting to RM816.6m.

Change to Forecasts  We slashed our FY15E earnings by 47% to RM62.8m as we adjusted its operating costs and financing costs accordingly. At the same time, we are also rolling out our FY16E earnings of RM72.9m.

Rating Downgrade to UNDERPERFORM

Valuation  We are comfortable with our current SoP valuation, which implies a TP of RM1.27 (refer overleaf for more details) as the stock is still highly geared in a challenging property environment. Given the sharp disappointment in earnings, we are taking this opportunity to downgrade the stock as it has rebounded fairly well with 14.8% YTD gain vs. KLPRP’s YTD gain of 3.1%. Hence we downgrade the stock to UNDERPERFORM from MARKET PERFORM.

Risks to Our Call  Faster project turnaround.

 Higher-than-expected orderbook replenishments. 

Source: Kenanga