1Q18 came below expectations accounting for 13% each of our and consensus full-year estimates, due to slower-thanexpected billings from construction and property division. Property sales of RM101.0m are also behind our and management targets of RM1.0b each. Lowered FY18-19E core earnings by 18-23%. Maintain OUTPERFORM with a lower SoP-Target Price of RM0.700 (previously, RM0.900).

Below expectations. 1Q18 Core Net Profit (CNP) of RM21.6m came in weaker than expected, which only accounts for 13% each of our and consensus full-year estimates. We believe the shortfall could be due to slower-than-expected billings from construction and property division. Property sales of RM101m are also below our and management targets of RM1.0b each. No dividends declared as expected.

Results highlight. 1Q18 CNP improved by 107%, YoY despite revenue declining by 19% attributable to: (i) sharp reduction in net interest cost by 88%, (ii) better contribution from associates and joint venture, and (iii) improvements in construction margin by 7ppt to 8%. We opine that MRCB could deliver a better performance if not being dragged down by its property division in which margin came off by 10ppt to 11% coupled with a lower property revenue (-9%). QoQ, 1Q18 CNP came off by 52% due to compression in margin of 21ppt for both property and construction divisions, down to 11% and 8%, respectively.

Con-call key takes. Management remains hopeful that LRT3 would progress as planned amid market concerns that it would be scrapped like MRT3. That said, management been having active discussion with the government to reach an amicable solution on EDL highway, which toll collections have been abolished since 1st Jan 2018 and is now classified as a federal road. We believe that it is unlikely for the government to scrap LRT3 unlike MRT3 as the project is already in progress, and opine that the government should prioritise the privatisation of EDL highway as its toll collections have already been abolished, which is part of their manifesto.

Outlook. In the near term, MRCB’s remaining external construction order-book stands at c.RM4.9b, and coupled with c.RM1.6b unbilled property sales, these numbers will provide the group 3-4 years of earnings visibility. Going forward, management is still keeping their sales target of RM1.0b for FY18 backed by previous launches, i.e. Sentral Residences and 9 Seputeh. Construction and property division aside, management remains hopeful to dispose its EDL highway in FY18.

Earnings review. In light of its weaker sales and slower billings, we revised our FY18-19E core earnings down by 18-23% as we reduced our FY18-19E sales target by 20-22% to RM843.5-938.3m.

OUTPERFORM maintained. Despite disappointment in earnings, we reiterate OUTPERFORM on the stock with a lower Target Price of RM0.700 (from RM0.900) as we further widen our property RNAV discount from 68% to 70% and company holding discount to 20% (previously, 5%). Our TP implies FY18E PBV of 0.7x which at its through level of 0.7x since 2009, and we believe that it is justified given improving earnings and the potential disposal of EDL highway.

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

Source: Kenanga Research - 31 May 2018