FY18 CNP of RM75.4m came in below our and consensus expectations, accounting for 88%/84% of respective estimates. Positively, property sales of RM470.0m are ahead of our expectation of RM447.3m. A 1.75 sen dividend declared was a surprise as we did not expect any dividend. No changes to FY19E CNP, introduces FY20E CNP of RM114.4m. Maintain MP with an unchanged TP of RM0.750.

Below expectations.FY18 Core Net Profit (CNP) of RM75.4m came in below our and consensus expectations, accounting for 88%/84% of our/consensus full-year estimates. Note that this is the third disappointment for the year. The negative variances are mainly due to: (i) slower-than-expected construction billings, (ii) lower-than-expected property development margins as some of their major development projects are still at sub-structure levels, and (iii) higher-than-expected effective tax. Positively, property sales of RM470.0m are ahead of our expectations of RM447.3m. The 1.75 sen dividend declared was a surprise as we did not expect any dividend for the year.

Results highlight. FY18 CNP fell by 25%YoY, on the back of a lower revenue (-34%). The sharp reduction in revenue is dragged down by its construction division due to the absence of project handover, and they are also affected by the project review undertaken by the government which affected the recognition for LRT3. To recap, MRCB handed over the KL Sports City back in 2017. QoQ, 4Q18 CNP declined 97% underpinned by i) sharp decline in revenue (-43%), ii) losses incurred by its joint-venture, and iii) high effective tax rate of 94%.

Outlook. Going forward, management has set a sales target of RM800.0m underpinned by its planned launches of RM900.0m of which RM400.0m are from Australia. However, we are only targeting sales of RM524.8-550.0m for FY19-20. Its unbilled sales stand at c.RM1.6b which will provide the group 3-4 years of earnings visibility. On its construction front, management do not rule out potential participation in ECRL given their strong interest in rail-related projects.

Earnings review. Post results, we make no changes to our FY19E earnings as we believe that its margin would improve once its on-going development project progresses past its start-up stage and billings from LRT3 resume. We also take the opportunity to introduce our FY20E earning of RM114.4m.

Maintain MARKET PERFORM with an unchanged SoP-driven Target Price of RM0.750. Our TP implies price to book of 0.68x, 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. While we are aware that the potential news flow on ECRL could result in positive share price sentiment; we prefer to be prudent as these contract margins might not be as compelling.

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 - 27 Feb 2019