FY18 CNP of RM33.4m came in below our estimate, accounting for 89% of full-year estimate. A 1.5 sen dividend was declared, spot-on with our estimate. Cut FY19E earnings by 19% after lowering FY19E replenishment target, construction billings and average margins. Downgrade to UNDERPERFORM from (MARKET PERFORM) with a lower SoP-derived Target Price of RM0.260 (from RM0.290).

Below expectations. FY18 CNP of RM33.4m came in below our estimate, accounting for only 89% of our full-year estimates while consensus figures are not available. This is the fourth consecutive quarter of disappointment. We believe the weak performance was mainly the result of lower-than-expected margins from the construction segment, with some of its on-going projects still at preliminary stages. A 1.5 sen dividend was declared, spot-on with our estimate.

Results highlight. YoY, FY18 CNP of RM33.4m declined 53% dragged mainly by lower contribution from its construction division as major projects (MACC headquarters, Residensi 22, Raffles American School) ceased contribution, all having been completed in 2017, exacerbated by higher effective tax rate (+2ppt). As a results, CNP margin declined to 4.0% (-2.1ppt). QoQ, 4Q18 CNP of RM10.0m soared 98%, despite a 20% decline in revenue as CNP margin saw improvement (3.7ppt) which stemmed from: (i) normalisation of margin from the construction segment, (ii) higher contribution from completed properties sold (Wangsa 9 Residency & Affordable Home - Seri Akasia) in 4Q18, which yielded better margin, and (iii) lower effective tax rate.

Reduce replenishment FY19E replenishment target. Moving forward, we believe near-term order-book replenishments may be uncertain. In FY18, MITRA’s wins amounted to RM200m, making up 80% of our targeted replenishment of RM250m. Given the challenging environment in the construction sector, we reduce FY19E replenishment target by 25% from RM400m to RM300m. Its current outstanding order-book stands at RM1.06b providing 1-1.5 year visibility. Unbilled sales for its property division stood at RM134.4m from its existing on-going projects, namely 'Wangsa 9 Residency' and 'Affordable Home - Seri Akasia.

Cut FY19E earnings, introduce FY20E earnings. Post results, we lower our FY19E earnings by 19% after: (i) lowering our FY19E replenishment target to RM300m, (ii) lowering construction billings, and (iii) reducing average construction GP margins (-1.5ppt) to 5.5%. Meanwhile, we introduce FY20E earnings of RM31.2m.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lowered SoP-derived TP of RM0.260 (from RM0.290) which implies FD FY19E PER of 7.1x, which is at the lower end of our ascribed valuation range of 6.0-11.0x applied on small-mid cap contractors under coverage due to: (i) uncertainty in terms of order-book replenishment, (ii) declining margins, and (iii) four consecutive quarters of disappointment.

Upside risks for our call are: (i) higher-than-expected margins, (ii) better-than-expected billings from construction works and property segment, (iii) higher-than-expected contract wins.

Source: Kenanga Research - 28 Feb 2019