With poorer-than-expected earnings from weak construction margins and a less inspiring outlook on termination of mega infrastructure projects, we cut MITRA’s FY18-19E earnings by 14-20%. Post results, we downgrade MITRA to MP (from OP) with a lowered SoP-derived TP of RM0.475.

Below expectations. 1Q18 CNP of RM13.4m is below our/consensus estimates making up 13% and 17% of our estimates, respectively. The negative deviation stemmed from lower-than–expected construction margins and revenue contribution from South Africa. No dividends declared as expected. We derive our CNP after stripping out; (i) additional compensation gains worth RM5.08m from forced land acquisition at Pengerang, and (ii) disposal gains of 35%-associate of RM0.75m. We note that MITRA is expecting to recognize another RM8.0m compensation gains in 2Q18 from Pengerang which we deem as one off.

Results highlight. 1Q18 CNP of RM13.4m was down 23% QoQ due to lower EBIT margins in all segments (construction, property and South Africa) on the back of a marginally lower revenue (-2%). 1Q18 CNP was down 29% YoY due to lower revenue (-9%) and poorer construction EBIT margins (-3.6ppt) as on-going jobs on hand were secured at lower margins exacerbated by rising construction material (i.e. steel) and labour costs.

Outlook less aspiring. With the new PH government reviewing and terminating major infra projects, we view this negatively for MITRA as they were gunning to participate in ECRL (under review) and HSR (terminated). We also foresee more contractors competing within a shrinking pie given the lack of major infra jobs. In view of this, we reduce our FY18-19E replenishment target for MITRA to RM800m (from RM1,200m). YTD, MITRA has secured RM100m worth of jobs and current outstanding order-book (as of 31/3/18) stood at RM1.47b providing 2-year visibility.

Meanwhile, MITRA has launched their final phase of Wangsa 9 (Phase 2-Block A – GDV of RM300m) in February-18. Take-up rate for the projects remains soft at c.5% but we foresee higher take-up post Raya season as the management ramps up on marketing activities. As of 1Q18, property unbilled sales are currently at RM161m mainly from Wangsa 9 (Phase 1) and Rumah Selangorku (Akasia) project. We expect to see most of this RM161m unbilled sales recognised by the end of FY18.

Cutting FY18/19E estimates. Post results, we adjust our FY18-19E earnings down by 23-36% after (i) lowering our average construction project EBIT margin to 6ppt (from 9ppt), (ii) reducing FY18-19E replenishment target to RM800m respectively (from RM1.2b), and (iii) lowering South Africa’s sales contribution.

Downgrade to MP (from OP) with a lowered SoP-derived TP of RM0.475 (from RM1.03) after rolling forward valuation base year to FY19 on reduced valuations of: (i) 7x (from 10x) for its construction segment, (ii) 5x for property (from 7x), and (iii) wider RNAV of 80% (from 60%) for South African division given the slower-than-expected earnings contribution. Our de-rating in valuations is a broad-based downgrade given the uncertainties from the new government and we believe our downgrade in rating is justifiable given MITRA’s less inspiring outlook coupled with the absence of rerating catalyst.

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 31 May 2018