FY19 CNP of RM706.1m makes up 104% of our/consensus full-year estimate, within our/consensus expectation. No dividend declared as expected. No changes to FY20E earnings, and we introduce FY21E earnings of RM527m. Maintain MP with unchanged SoP-driven TP of RM3.75.

Within expectations. FY19 CNP of RM706.1m makes up 104% of our/consensus full-year estimate, within our/consensus expectation. No dividend declared as expected, but the 12.0 sen dividend declared in previous quarters is within our expectation.

Results’ highlight. Compared against FY18 figures unadjusted for MFRS, FY19 CNP came off by 14%, YoY, due to decline in construction and concession operating profits at group level, down by 29% and 10%, respectively. On joint-ventures, its construction and property divisions both registered decline in pre-tax profit by 15% and 19%, respectively. QoQ, 4Q19 pre-tax profit fell 5% albeit 45% growth in revenue due to an impairment in its construction division which caused a loss of RM10.4m. However, a CNP growth of 5% was registered, thanks to lower effective tax rates.

Briefing’s highlights. The results’ briefing was well attended by more than 40 analysts and bankers. This time around, management shared their aspiration and plans of making Australia their second home base after Malaysia, as they seek to acquire a stake in a local second-tier contractor i.e. Martinus Rail, a subcontractor to the Tier 1 giants that specialises in railway track. This is part of their 3-pronged approach i.e. Partnering, Acquisition, and Organic growth into the Australian market, and the acquiring of a local company would help speed up their learning curve in Australia, coupled with the prospects of AUD20.0b worth of railway jobs in Australia. On the local front, management remains positive with the prospect of PTMP and hopeful of the revival of MRT3 as it is one of the most critical line for the urban rail transportation system in the Klang Valley.

Earnings revision. No changes to our FY20E earnings and we introduce our FY21E earnings of RM527m.

Maintain MARKET PERFORM as we believe that management’s decision to target and grow Australia as their second home base is a much-needed move to diversify their earnings risk geographically as its construction arm is too concentrated in Malaysia. No changes to our SoP-driven Target Price of RM3.75. Our TP implies FY20E PER of 15.9x is higher compared with our construction universe’s ascribed multiple range of 6-11x as its sum-of-parts valuation comprises contributions from property and concessions assets that skew the PER higher. Nonetheless, the implied target PER of 15.9x is +0.5 SD above its 5-year historic forward mean of 14.9x.

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 - 30 Sep 2019

Source: Kenanga Research - 30 Sept 2019