We met up with MITRA’s management and came away feeling more assured on its prospects given better clarity over the proposed cash call and cost overruns at RAPID. Post meeting, we reinstate our confidence on MITRA over its execution track record despite the last two waves of unfortunate news which had hammered its share prices. Maintain FY17 CNP but increase FY18E CNP by 15%. Upgrade to OP with higher cum/ex TP of RM1.09/RM0.94.

Clearing the air over their cash call. In line with the growing construction revenue since FY13, their 100%-owned construction subsidiary – Pembinaan Mitrajaya S/B’s (PMSB)’s borrowings has increased due to: (i) new CAPEX totalling RM155m since FY13, and (ii) retention sum* ballooning to RM112m. Hence, the cash call is to pare down debts parked under PMSB whereby its gross gearing was at 0.8x as of 2Q17. The move was necessary as they were at a disadvantage in securing jobs with value of >RM100m due to the high gross gearing in PMSB as clients’ emphasises on financial strength at the company level i.e. PMSB. It is preferable for PMSB’s gross gearing to be under 0.5x. Post rights, PMSB’s gross gearing level will ease to more comfortable levels of 0.30x. Therefore, we believe MITRA is poised to grow their construction order-book further moving forward. (refer back)

RAPID-ly flushing out earnings risks by FY17. Recall that MITRA had reported weaker-than-expected earnings in 2Q17 due to cost overruns from their RAPID project (contract sum of RM186m; outstanding of RM46m). Given that most critical areas of the RAPID job will be completed by FY17E, we think FY18 earnings risks is less severe than what we have built-in earlier, at RM12m losses before tax from this project. While risks for further cost overruns persist for the rest of FY17, we note that we had imputed in a cumulative loss of RM35m for the RAPID project in FY17E (incurred loss of RM13m in 2Q17) which we feel is conservative enough for the remainder of project given that it is currently at c.75% progress mark. (refer back)

Strong property billings in FY18. Currently, MITRA’s property unbilled sales stand at RM233m where the bulk is from Wangsa 9 Phase 1 and 2 accounting for 70% or RM164m. Given that Wangsa 9 Phase 1 and 2 is bound for delivery in FY18, we believe they would be ripe for advance billings stage in FY18. Also, Wangsa 9 Phase 3 (GDV RM300) will be launched in Jan 2017 and construction of the foundation is currently underway (at c.80%). Since Wangsa 9 Phase 3 construction in already in progress, we note that billings from this project can be recognised immediately once the project is launched.

FY18E earnings upgrade. Post meeting, we maintain FY17E earnings but upgrade our FY18E CNP by 15% after: (i) reversing out expected losses before tax of RM10m from RAPID project (vs previous expected loss of RM12m), and (ii) expedite billings progress from Wangsa 9 Phase 1 and Phase 2 in FY18 given that unbilled sales ripe for advance billing stage, and (iii) higher billings from Wangsa 9 Phase 3 given that construction is already underway prior to launch. (refer back)

Upgrade to OP from MP. Post earnings adjustment, we increase MITRA’s SoP derived cum/ex TP to RM1.09/RM0.94 (from RM0.95 /RM0.84). We believe our upgrade is fair as: (i) majority of earnings risks stemming from RAPID project will be flushed out by FY17, (ii) there is more clarity over the rights exercise, and (iii) PMSB’s balance sheet strength post rights is in a much better footing for future order- book growth. Also, since 2Q17 results release, MITRA’s share price has fallen 30% and we note that MITRA is currently trading at 7.4x Fwd PER based on our new FY18E estimates which is at an appealing level.

Source: Kenanga Research - 06 Nov 2017