1H19 performance disappointed both our and consensus expectations with a CNL of RM39.8m. Positively, its 1H19 property sales of RM244.0m is on track to meet our full-year expectation of RM524.8m. No dividends declared as expected. Cut FY19E CNP by 96%, while maintaining FY20E CNP at RM102.1m. Maintain UP with lower SoP-driven TP of RM0.700.

Below expectations. Its 1H19 performance disappointed both our and consensus expectations, as they recorded a CNL of RM39.8m (excluding an one-off gain of RM55.0m from the disposal of One IFC Sdn Bhd). The disappointment stemmed from slower-than-expected progressive billings from both construction and property development divisions. That aside, property development margins were also lower than expected due to the upfront construction cost booked in for projects like Sentral Suites. Positively, its 1H19 property sales of RM244.0m is on track to meet our full-year expectation of RM524.8m. No dividends declared as expected.

Results highlight. MRCB registered 1H19 CNL of RM39.8m vs. CNP of RM55.0m in 1H18, mainly due to the sharp drop in revenue which fell by 43%. The sharp decline in revenue is driven by its property development and construction divisions, which saw revenue declining 62% and 26%, respectively, due to slow billing progress. As for 2Q19, revenue saw a marginal growth of 3% but incurred CNL of RM43.9m compared to CNP of RM4.1m in 1Q19. This is mainly due to the mismatch in cost recognition in which they incurred upfront construction cost for several developments, especially Sentral Suites, but unable to book in billings as the progress for these projects are still at the start-up phases.

Outlook. We are keeping our sales target of RM524.8-550.0m for FY19-20, which we believe are achievable due to their on-going efforts in promoting their projects to overseas markets, especially Hong Kong. Its unbilled sales stand at c.RM1.8b which will provide the group 3-4 years of earnings visibility. On its construction front, management does not rule out potential participation in ECRL given their strong interest in rail-related projects and remains hopeful that LRT3 will recommence into full-swing by 1H20.

Earnings review. Post results, we cut our FY19E earnings by 95% as we further lowered our margin assumptions for its development division due to timing issues, and re-timed some of the billings progress for both its construction and property development divisions. No changes to FY20E earnings as we expect progress to pick up pace for both construction and property development divisions.

Maintain UNDERPERFORM with a lower SoP-driven Target Price of RM0.700 (from RM0.750). Our TP implies price to book ratio of 0.65x, which is close to 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 efforts to enhance 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 newsflow on ECRL could result in positive share price sentiment; we prefer to be careful as the margins are not compelling.

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

Source: Kenanga Research - 27 Aug 2019