9M18 CNP of RM74.8m came in below expectations, making up 56%/69% of our/consensus full-year estimates. Property sales of RM356.0m are also lagging behind both our and management’s target of RM0.80b each. No dividends declared as expected. Post results, we slashed our FY18- 19E CNPs by 36% and 33%, respectively. Maintain MP with a lower TP of RM0.750 (previously, TP: RM0.800).

Below expectations.9M18 Core Net Profit (CNP) of RM74.8m came in below our and consensus expectations, accounting for 56%/69% of our/consensus full-year estimates. Note that this would be the second disappointment for the year. The negative variances are mainly due to: (i) slower-than-expected construction billings and (ii) lower-than- expected property development margins as some of their major development projects were still at sub-structure progress levels. Property sales of RM356.0m are lagging behind both our/management’s target of RM0.8b each. No dividends, as expected.

Results highlights. 9M18 CNP improved by 33%YoY, despite revenue declining by 38% attributable to: (i) sharp reduction in net interest cost by 68% as management had ceased accounting for EDL, (ii) better contribution from associates and joint-venture (+109%) arising from the contribution of LRT3 PDP fees, (iii) lower minority contribution (-90%), and (iv) better construction margins of 8% (+3ppt). QoQ, 3Q18 CNP declined 41% albeit registering revenue growth of 64% due to: (i) sharp decline in construction margins from 13% to 2% due to higher progress of lower margin projects while property margins also declined to 7% (- 9ppt), and (ii) higher effective tax rate of 54% (2Q18: 25%).

Conference call key takes. Going forward, management revised down their property sales target of RM0.8b to RM0.5b due to the challenging sales environment in the property sector. That aside, they are hopeful of recognising billings from LRT3 in 1Q19 as construction works resume. In terms of land sale, management indicated that there might be no major land sales in 2019, except for the disposal of its Bukit Jalil land to EPF at cost.

Outlook. In the mid-to-near-term, MRCB’s remaining external construction order-book stands at c.RM10.5b which will provide them a steady stream of jobs for the next 5 years due to the nature of the job as some of the projects would only commence a few years later depending on the development timeline of their client. As for property division, unbilled sales of c.RM1.6b will provide the group 3-4 years of earnings visibility. In view of its weak sales and challenging outlook for the property sector, we reduced our FY18 sales target from RM0.80b to RM0.45b, while management revised their sales target to RM0.50b.

Earnings review. Post results, we slashed our FY18-19E earnings by 36% and 33%, respectively after (i) we revised our FY18 sales target lower to RM0.45m from RM0.80b, (ii) adjusted the progress timeline for LRT3, and (iii) lowered margin assumptions for its construction and development projects to better reflect existing margins.

Maintain MARKET PERFORM with a lower SoP-driven TP of RM0.750 (from RM0.800), post revision in earnings. Our TP implies price to book of 0.75x which is close to its trough levels. We opine that the long-term outlook for the company is relatively stable compared to other contractors or developers due to their massive outstanding order- book and transit-oriented-developments. However, we note that management would need to step up in increasing efficiency by further lowering their operating costs to remain competitive and improve overall profitability as margin erosions have been evident.

Risks include: (i) weaker/stronger-than-expected property sales, (ii) higher/lower-than-expected administrative cost, (iii) positive/negative real estate policies, and (iv) changes in lending environment.

Source: Kenanga Research - 23 Nov 2018