Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit RM2.6m was below expectations, accounting for merely 4% and 3% of our and consensus’ full-year estimates, respectively. The reason for the core net profit falling below expectations was due to delayed contributions from the property segment (i.e. Sentral Residences), and lower contributions from JV and associates.

Dividends

None, as expected.

Key Results Highlights

QoQ, revenue was up by 31% to RM530.3m across all business divisions. However, EBIT margin dropped by 7.5ppt to 12% due to higher gains recognised in 1Q15 from disposal of Platinum Sentral. Lower contributions of associates (-44%) and joint venture (- 64%), and stripping off gains from Salak South (RM38m) land, and write-backs from Nu Sentral (RM34m), core net profit was dragged into the red to - RM11.9m (from RM14.5m)

YoY-Ytd, topline was up by 76% to RM934.5m on contributions from most divisions, i.e. construction, infrastructure and property which was mainly from: (i) completion of Q Sentral, (ii) one-off disposal gain from Platinum Sentral, and (iii) on-going development at Sentral Residences and 9 Seputeh. However, higher interest expense (+5%), and one-off disposal gains on Salak South Land (RM38m) and write-backs on land provision for Nu Sentral Mall (RM34m) dragged down core net profit by 91% to RM2.6m.

Outlook

MRCB plans to launch at least c.RM1.0b worth of development projects in the immediate-term, consisting of “affordable” residentials in Kajang (GDV: RM234m), high-end residences near KLCC namely The Grid (GDV: RM387m), and office buildings in Putrajaya (GDV: RM336m). However, given the weak property market, we would not be surprised if the group scales back launches.

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

Change to Forecasts

Refer below.

Rating

Downgrade to UNDERPERFORM

Valuation

We downgrade MRCB to UP (from MP) with a lower TP of RM0.81 (from RM1.27 based on SoP valuation). We revert to its historical low Fwd P/NTA 0.86x on FY16E NTA/share of RM0.94 given the company’s relatively high net gearing, which will make it more difficult to realize its property development projects in such a weak property sector backdrop. As a result, we opt to look at its historical low valuation as a base point. We downgrade our call to UNDERPERFORM premised on potential further earnings weakness and possibility of some form of cash calls if the underlying situation persists.

Risks

Stronger-than-expected property sales.

Lower-than-expected sales and administrative costs.

Source: Kenanga Research - 25 Aug 2015