1H17 CNP of RM28.3m came below expectations as it only makes up 37% and 22% of our and streets’ full-year estimates, respectively. The performance was short of our and streets’ expectations due to lower-than-expected margins from construction and property division. No dividends were declared as expected. Reduced FY17-18E CNPs by 29%-25%, respectively. Maintain OUTPERFORM with a lower SoP-driven ex-all Target Price of RM1.23.

Below expectations. 1H17 CNP of RM28.3m came below expectations as it only makes up 37% and 22% of our and streets’ fullyear estimates, respectively. Its performance was short of our and streets’ expectations due to lower-than-expected margins from construction and property division. No dividends were declared as expected. In terms of property sales, MRCB recorded RM942.0m sales in 1H17 which is on track to meet our and management’s target of RM1.1b and RM1.2b, respectively, as we are expecting its sales momentum to slow down as we do not expect any more major new launches.

Results highlight. YoY, 1H17 CNP grew by 6% underpinned by a strong revenue growth of 55%. The revenue growth is mainly driven by its construction and property divisions, which grew by 49% and 28%, respectively. Apart from revenue growth, it also saw a sharp reduction of 20% in financing costs as a result of its de-gearing exercise back in 2016. In terms or margins performance, its construction margin saw an improvement of 1ppt to 2%, while its property development saw a major decline of 25ppt to 16% due to the lack of asset sale. QoQ, 2Q17 CNP grew 71% backed by 44% growth in revenue that was mainly driven by its construction that registered 129% growth in construction revenue coupled with improvements in construction margins (+2ppt). That said, the improvement in associate and jointventures contribution (+718%)also helped in cushioning the poor performance by its property and infrastructure divisions.

Outlook. For FY17, management is on track to meet its sales target of RM1.2b, backed by its recent launches of Sentral Suites (GDV: RM1.5b), 1060 Carnegie (GDV: RM305.0m), Bukit Rahman Putra (GDV: RM100.0m). MRCB’s remaining external construction order-book stands at c.RM5.5b. Coupled with c.RM1.5b unbilled property sales, these numbers will provide the group with at least four years of earnings visibility.

Downward revision in earnings. Post results, we slashed our FY17- 18E CNPs by 29% and 25% to RM54.1m and RM72.6m respectively, as we lowered our margin assumptions for its construction and property divisions as our earlier assumptions are slightly optimistic. However, we raised our FY17 sales target of RM1.1b to match management’s RM1.2b target for the year.

Maintain OUTPERFORM with a lower ex-TP of RM1.23. We have lowered our SoP-driven Target Price to RM1.23 (cum-rights TP, RM1.45), from RM1.32 (cum-rights TP, RM1.65) on lower construction earnings while we lower property margins assumption for our property RNAV given the significant margin compressions observed during this earnings season. Nonetheless, investors may look beyond the current earnings momentum and train their attention on the promising structural changes through its de-gearing exercise via the rights issuance exercise which would bring the company into net cash position from its current net gearing level of 0.96xcoupled with the potential sale of EDL in the future.

Downside risks to our call include: (i) weaker-than-expected property sales, (ii) margin risks, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 30 Aug 2017