1H19 CNP of RM345.2m makes up 58%/55% of our/consensus full-year estimates. However, we deem the results to be broadly within expectation as we are expecting further weakness in construction margins due to the cost review of MRT2. No dividend was declared, as expected. No changes to FY19-20E earnings. Maintain MARKET PERFORM with a lower SoP-driven Target Price of RM2.85 (vs. RM3.05 previously).

Broadly within. 1H19 CNP of RM345.2m makes up 58%/55% of our/consensus full-year estimates. However, we deem the results to be broadly within expectation as we are expecting further weakness in construction margins due to the cost review of MRT2. No dividend was declared, as expected.

Results highlight. 1H19 CNP came off by 17%, YoY due to: (i) decline in contribution from joint-ventures from both its construction and property divisions, which recorded lower pre-tax profit of 37% and 13%, respectively. Positively, its own property division registered improvements in margin from 8% to 10% charting pre-tax profit growth of 17% despite flattish revenue. QoQ, 2Q19 saw 24% surge in revenue, but it only registered flattish CNP growth of 1% due to sharp compression in operating profit, which came down to 14% (-7ppt). The margin compression stemmed from its concession division, which registered a lower operating margin of 54% (-7ppt).

Briefing highlights. This time around, management sounded much more optimistic on the construction outlook within the country underpinned by potential projects like ECRL, KVDT, RTS, Pan Borneo Sabah, MRT3, PTMP and some privately funded infra projects (airports). While we concur with management’s view on the prospects of the above-mentioned projects, we deem that the timeline for the award of the project could take up to 9 months or longer. As for its highway concessions, management remains hopeful for a deal with the government that they would be able to agree at a fair price for the potential takeover which is expected to take place within this year.

Earnings unchanged. Post results, no changes to our FY19-20E earnings.

Maintain MARKET PERFORM. We revised our SoP-driven Target Price downwards to RM2.85 (vs. RM3.05 previously), on some housekeeping on our assumption for concessions on which we lowered our traffic projection for its highways. Our TP implies FY19E PER of 11.9x which is slightly higher as compared with our universe ascribed multiple range of 6-11x. We believe that the slight premium is justified given the stable recurring income from its concessions, albeit the potential takeover by the government.

Risks to our call include: (i) ahead of schedule/unexpected delay of MRT2 project, (ii) lower/higher-than-expected input costs, and (iii) higher/lower-than-expected property sales.

Source: Kenanga Research - 28 Mar 2019