1H16 core profits of RM26.6m is broadly within our (21%) and consensus’ (33%) expectations. We estimate 1H16 sales of RM202m, which is also broadly within our FY16E sales target of RM600m (33%) as launches are skewed to 4Q16. No dividend declared as expected. We make no changes to earnings forecasts. Call/TP is UNDER REVIEW (previously MP/TP: RM1.20) pending our sector update next week.

1H16 core net profit (CNP) of RM26.6m came broadly within our (21%) and consensus’ (33%) expectations. The reason for results being broadly within is due to the fact that we have factored in the gains on disposal of Menara Shell (RM139m) which is expected to be completed by 4Q16. We estimate year-to-date sales of RM202m (pending clarification from management), which makes up 33% of our FY16E sales target of RM600m, mainly from sales at 9 Seputeh and Bandar Seri Iskandar.

Results Highlights. Top line was down YoY-Ytd (-12%) mainly due to the property segment as Q-Sentral is at the tail end of completion. Additionally, higher interest expense (+2%) coupled with the sale of Platinum Sentral (RM220m) in 1H15 brought CNP down (-88%). QoQ, top line was lower mostly due to the construction segment due to higher contributions for projects such as LRT Ampang line and LRT Stations 6 & 7 in 1Q16. However, PBT improved (+295%) on higher contributions from associates and joint-ventures and from the completed sale of Sooka Sentral (RM41.6m), bringing CNP back into the black to RM45.5m.

Outlook. The disposal of Menara Shell is subject to approvals by shareholders of MRCB and MQREIT, and green lights from Bursa and SC, and is expected to be completed by 4Q16, which we have already built into our estimates. Management is expecting FY16 sales of RM1.0b from launches at Sentral Suites (GDV: RM1.4b), Bukit Rahman Putra (GDV: RM415m) and Bandar Sri Iskandar (GDV: RM43m) towards 2H16. However, we are expecting sales of RM600m in FY16 as launches are mostly in 2H16 and given the weak property market, we would not be surprised if the group scales back launches. MRCB’s remaining external construction order book is at c.RM6.6b, coupled with c.RM1.3b unbilled property sales providing the group with at least four years of earnings visibility.

UNDER REVIEW. We are placing our call/TP under review pending our sector update next week (previous call/TP:MP/TP@RM1.20 based on FY16E Fully Diluted NTA/share of RM0.86 and an applied Forward P/NTA of 1.40x which is -1.5SD to the average 6-year historical mean. In our last sector strategy (8/7/16), we had highlighted that we are monitoring two key indicators; (i) developers 1H16 sales must meet 40% of full-year targets (before any revisions during the year), and (ii) unbilled sales must have more than one-year visibility. If majority of developers fail on one or both conditions, we are likely to maintain a negative bias on the sector; however, if both are mostly met, we may upgrade the sector to NEUTRAL. So, we will wait for the results round-up to determine our sector call, and thus, our individual stock calls.

We are also aware that the feel-good sentiment from the upcoming Budget-2017 will soon be translated to positive news flow, which in turn, may separate the weak sector fundamentals from developers’ share price performance.

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 - 26 Aug 2016