Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit RM7.0m was below expectations, accounting for merely 21% and 9% of our and consensus’ full-year estimates, respectively. The reason for the core net profit falling below our expectation was due to our bullish net margin assumptions and higher than expected financing cost.

Year-to-date sales of RM467m made up 93% of our FY15E sales target of RM500m.

Dividends

None, as expected.

Key Results Highlights

QoQ, revenue was down by 29% to RM374.1m mainly due to the property segment due to the completion of Q Sentral in 2Q15, while there have been delayed launches (i.e. The Grid, 3 Residences and Semarak City), and softer sales at 9 Seputeh. However, EBIT margins improved by 5ppt to 17% on higher contributions of associates (139%) and no losses from joint-ventures. This pushed core net profit back into the black to RM4.4 (from losses of RM11.9m). To recap, 2Q15 core net profit was dragged into the red after stripping off gains from Salak South (RM38m) land disposal, and writebacks from Nu Sentral (RM34m).

YoY-Ytd, topline was up by 27% to RM1,308.5m on contributions from construction, infrastructure and investment holding. However, higher interest expense (+7%), taxation (+26%), 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 87% to RM7.0m.

Outlook

MRCB plans to launch at least c.RM1.0b worth of development projects in FY16, 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.RM3.7b, coupled with c.RM1.7b unbilled property sales providing the group with at least two years of earnings visibility.

Potential joint-venture and associate business include: Sentral Residences (51%), Bandar Sri Iskandar (70%), Q Sentral Office Tower (66%) and Kwasa Sentral (70%).

Change to Forecasts

We maintain our topline estimates (of RM1.5-RM2.1b for FY15-16E)) and orderbook replenishment (of RM1.6b- RM1.8b for FY15-16E).

However, we cut FY15-16E core earnings by 44%-32% on margin compression to 3%-2% (from 4%-3%) to account for higher than expected financing cost.

Rating

Maintain MARKET PERFORM

Valuation

Maintain MP and TP of RM1.63 based on the average 6- year historical mean Fwd P/NTA of 1.73x on FY16E NTA/share of RM0.94.

We are pegging valuations to average level on the group’s turnaround efforts which are expected to further improve investors’ sentiment as turnaround plans materialise. As such, we maintain the valuations although earnings may be weak in the near-term due to its compelling turnaround plans.

Risks

(i) Weaker-than-expected property sales, (ii) Lower-thanexpected sales and administrative cost. (iii) Negative real estate policies (iv) Tighter lending environments

Source: Kenanga Research - 20 Nov 2015