1H18 Core Net Profit (CNP) of RM55.0m accounts for 41%/33% of our/consensus full-year estimates, which we deemed at broadly in line as we are expecting a stronger 2H18, but below consensus. Property sales of RM261.0m are lagging behind our and management’s target of RM0.8b/RM1.0b. Maintain estimates for now. No dividends declared as expected. Maintain MP with an unchanged TP of RM0.700. Broadly inline.1H18 Core Net Profit (CNP) of RM55.0m accounts for 41%/33% of our/consensus full-year estimates. However, we deem it as broadly in line as we are expecting a stronger 2H18 driven by further improvements in construction division, billings from property development coupled with more land sale recognition. However, it fell short of consensus full-year estimates as we believe the consensus could be too aggressive on its construction and property billing recognition. Property sales of RM261.0m are lagging behind both our/management’s target of RM0.8b/RM1.0b each. No dividends declared as expected.

Results highlight. 1H18 CNP improved by 94% YoY, despite revenue declining by 35% attributable to; (i) sharp reduction in net interest cost by 71% as management has ceased accounting for EDL, (ii) better contribution from associates and joint-venture, and (iii) improvements in construction margins by 9ppt to 11%. We opine that MRCB could deliver a better performance if it was not dragged down by its property division where margins came off by 3ppt to 13% coupled with a lower property revenue (-15%) due to the absence of project handover. QoQ, 2Q18 CNP improved 54%, driven by the improvement in both construction (+5ppt) through cost savings and value engineering initiative, and property margins (+5ppt) due to the recognition of land sale in Penang.

Conference call key takes. Management remains hopeful given that negotiation on the cost saving initiative on LRT3 is progressing well and disposal of EDL highway is also on-track. Going forward, management remains focused in its core businesses, i.e. property development and construction, while exploring more opportunities in unlocking its land value through land sales.

Outlook. In the mid-to-near-term, MRCB’s remaining external construction order-book stands at c.RM5.1b, and coupled with c.RM1.7b of unbilled property sales, these numbers will provide the group 3-4 years of earnings visibility. For now, we are keeping sales target of RM1.0b for FY18 backed by its previous launches, i.e. Sentral Residences and 9 Seputeh as we expect property sales to pick up in 2H18 as we expect to see a ramp-up in marketing activities. However, if the group has not achieved at least 65% of our full-year target by 3Q18, we will look to trim our estimates.

Earnings review. Post results, there are no changes to our FY18-19E earnings.

Maintain MARKET PERFORM. We maintain MARKET PERFORM, with an unchanged Target Price of RM0.700. However, we might look to upgrade our Target Price and recommendation should more positive development on EDL and LRT3 emerges. Our TP implies 0.7x PBV on FY18E BV/share of RM1.01 which is at trough levels.

Downside risks 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 - 03 Sep 2018