MRCB announced a Letter of Award (LoA) to carry out the Pahang river estuary conservation (Phase 3) project, package 2 for a contract sum of RM188.7m. We are neutral on this news as the contract is within our orderbook assumptions, but we are mildly positive as pre-tax margins are above average for such environmental projects at c.15% (vs. c.7%). Increase FY16-17E earnings by 2.3%-9.0% to account for better project margins.Maintain MARKET PERFORM and TP of RM1.20.

Bagging another Letter of Award. MRCB’s announced a Letter of Award from Jabatan Pengairan dan Saliran, Malaysia (Malaysian Irrigation and Drainage Department) to carry out the Pahang river estuary conservation (Phase 3) project, package 2, which involves restoring the estuary of the river near Kuala Pahang for a contract sum of RM188.7m. The main component of the project is to extend an additional 345 metres in length to the breakwater constructed earlier and river protection works under the Pahang river estuary conservation (Phase 3) project. The construction period will take up to 24 months and to be completed by July 2018.

Neutral to mildly positive. We are neutral on this news as the project value of RM188.7m is within our construction orderbook replenishment assumptions of RM1.0b. That being said, we are mildly positive on this particular project compared to other construction awards as pre-tax margins are higher for environmental projects at c.15% vs. other construction projects of c.7%. As such, this contract is expected to contribute c.RM14m to MRCB’s bottom-line per annum. Year-to-date, MRCB has bagged RM893.5m worth of construction works, representing 89.3% of our FY16E construction orderbook replenishments with a remaining RM106.5m balance to be filled.

Increasing earnings by 2.3%-9.0% in FY16-17E. We are increasing our earnings marginally by 2.3%-9.0% FY16-17E to RM125.2-68.4m to account for better margins recognised on this project of c.15% vs. our 7% pre-tax margin assumption for other construction projects.

Outlook. While this contract is within expectation, we note that MRCB has already bagged 89.3% of our construction replenishment assumptions within six months of FY16, and we may look to upgrade our construction orderbook assumptions if they continue securing jobs at this pace. MRCB’s remaining external construction orderbook is at c.RM6.4b, coupled with c.RM1.5b unbilled property sales providing the group with at least four years of earnings visibility.

Reiterate MARKET PERFORM but lower TP of RM1.20 on a Fully Diluted FY16E NTA/share of RM0.86 as we apply Forward P/NTA of 1.40x which is - 1.5SD to the average 6-year historical mean. We applied a below average discount as sentiment continues to weaken while we expect the sector to derate further in the absence of near term earnings accretive catalysts.

Downside risks to our call include; (i) weaker than expected property sales, (ii) lower than expected sales and administrative cost, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 4 Jul 2016