First contract win for the year - PPA1M apartment construction worth RM103.1m. While we are neutral on the win, we raised our FY18E replenishment target higher to RM1.2b (from RM1.0b) as we are positive on MITRA’s contract replenishment outlook and stronger balance sheet post rights issuance in 1Q18. Upgrade FY18E CNP by 7% while FY17E CNP is unchanged. Reiterate OP with higher SoP-derived cum/ex TP of RM1.20/RM1.03.

First FY18 contract win. Yesterday, MITRA announced that they have bagged a PPA1M job from Putrajaya Home S/B worth RM103.1m slated for completion on 14 January 2021. The scope of work entails construction of 404 units of PPA1M apartments inclusive of 1 block of multi-level parking, 1 surau and common facilities in Precinct 17, Putrajaya.

Neutral. We remain neutral with this win as it is within our FY18E replenishment target of RM1.0b. Assuming PBT margins of 8%, we expect this PPA1M job to contribute c.RM2.0m/annum to MITRA’s bottom-line for the next three years. To recap, MITRA clinched RM1.02b of contract wins in FY17 – slightly above our FY17 replenishment target of RM800m. That said, we highlight that one of the contracts (worth RM132.5m) secured in FY17 will only commence in Aug 2018 when profit contributions will start kicking in.

Strong order-book replenishment visibility. Moving forward, we believe MITRA is backed by a strong flow of contracts possibly from: (i) Bank Negara Malaysia (BNM) – given MITRA’s close working relationship with BNM which recently acquired a tract of land (22.5ha) from the government for RM2.0b to develop education and training facilities, (ii) OSK’s “Ryan and Miho” (GDV of RM756m) condominium project at Section 13 given that MITRA is currently working on OSK’s PJ Midtown project (RM293m contract value) which is within the vicinity, (iii) LRT3 station sub-packages, and (iv) Rapid infrastructure jobs.

ECRL and HSR? Building jobs aside, we also believe MITRA could be a potential contender in mega rail projects i.e. ECRL and HSR given that these projects are non-urban infrastructure jobs that fit into MITRA’s operating space. Unlike the MRT3 (urban job) which has higher risks of delays/cost overruns due to traffic conditions, the ECRL and HSR are greenfield projects that MITRA favours. On the back of the potential contract flows and a stronger balance sheet post rights issuance, we are positive over MITRA’s outlook and hence we upgrade our FY18E replenishment target to RM1.2b (from RM1.0b). Currently, outstanding construction order-book stands at RM1.8b providing visibility for 1.5-2.0 years while its property unbilled sales stands at RM200.0m.

Upgrade FY18E earnings. Post adjustment to our FY18E replenishment target, we upgrade our FY18E CNP by 7% to RM105m while making no changes to FY17E earnings.

Valuations. We reiterate our OUTPERFORM call with a higher SoP- derived cum/ex TP of RM1.20/RM1.03 (from RM1.09/RM0.94) post adjustment to earnings. We believe our valuation is fair as it implies FY18E PER of 9.0x, in line with our applied target of 8-13x for small-to- mid cap contractors. We like to highlight that MITRA is currently trading at highly compelling levels of 7.1x FY18E PER* vs. small-to-mid cap peers which are currently trading at Fwd. PER levels of 9.1-15.2x. Risks associated with our call include: (i) lower-than-expected contract margins, and (ii) lower-than-expected job wins.

Source: Kenanga Research - 10 Jan 2018