Reeling from the knock-on effects caused by the Covid-19 pandemic, FY20 will likely turn out to be a wash-out year for MRCB. Essentially, the ongoing MCO would inevitably hit on the progress billings of its existing property and construction projects and could also force the scaling back of full-year targets for new property sales and construction order-book replenishment. Consequently, we have lowered our FY20E/FY21E earnings by 54%/4%. Following the share price run-up of 44% since our upgrade in end-March, and given the murky outlook, we have downgraded our call from OP to UP on unchanged TP of RM0.43 (based on PBV of 0.40x or -2SD below mean).

A wash-out year. With Covid-19 wreaking havoc across the board, the property and construction sectors (which the Group is involved in) are not spared too. Specifically, the enforcement of the Movement Control Order (MCO) for eight weeks now (which may be extended further) has led to a virtual standstill of its business activities. This, in turn, will affect the progress of its ongoing property and construction projects, resulting in delays of revenue recognition (where every four weeks of stop-work would theoretically translate to nearly 8% impact on its yearly revenue). And it remains doubtful at this juncture whether the progress billings of these projects would be able to play catch-up post the lifting of MCO given the possible supply chain disruptions as the MCO exit is expected to be implemented in phases. In addition, MRCB is expected to review its previous full-year new property sales target of c.RM500m for FY20 (after achieving sales of c.RM40m in 1QFY20 and RM537m in FY19) and may face challenges to replenish its construction order-book (versus last year’s new contract wins of RM317m).

LRT3 update. Meanwhile, the key takeaways from our conference call on the LRT3 project are as follows; (a) the legal dispute in MRCB George Kent Sdn Bhd (the JV company jointly owned by MRCB and George Kent who is the turnkey contractor for the LRT3 project) is still pending court ruling. Recall that a Notice of Arbitration was initiated in Aug 2019 to resolve a difference of opinion on financing options (whether to use internal funding, 3rd party funding or shareholders’ funding for working capital requirements at the JV company level), (b) following the government’s slashing of the overall project cost by 47% to RM16.6b, the renegotiation process for previously awarded contracts between the JV company and the work package contractors is still in progress, albeit at a relatively slow pace, and (c) there is possibility the percentage of completion for the LRT3 project may not hit the initial target of 40% at the end of this year (from the 24% completion stage end-2019) in the aftermath of Covid-19 outbreak. This project contributed a net profit of RM0.6m in FY19, versus RM14.6m in FY18.

Earnings cuts. We have cut our earnings forecasts to RM26m (-54%) for FY20 and RM65m (-4%) for FY21 after tweaking the timing of income recognition and lowering our property sales/construction order book replenishment assumptions.

Downgrade to UNDERPERFORM. Our TP remains at RM0.43 (based on PBV multiple of 0.40x or -2SD from mean). The stock has risen 44% since our upgrade in end-March, currently trading at stretched FY20E PER of 82x. Hence, we are downgrading our call from OP to UP.

Risks to our call include: (i) stronger-than-expected property sales, (ii) better-than-expected construction order-book replenishment, and (iii) higher-than-expected margins.

Source: Kenanga Research - 28 Apr 2020