1QFY20 CNP of RM16m came within our (at 25%), but above consensus expectations (at 35%). Consensus might have underestimated the maiden earnings contribution from their Australian project – 1060 Carnegie Melbourne. We continue to like the name for their status as the largest Bumiputera contractor and prime land banks. Maintain OP with an unchanged TP of RM0.75.

Within our but above consensus. 1QFY20 core net profit (CNP) of RM16m came within our estimate at 25% but above consensus’ at 35% as they might have underestimated the maiden earnings contribution from 1060 Carnegie Melbourne which is due for handover* (and recognition) this year. Despite expecting a weak 2QFY20 from the MCO, we believe our FY20 earnings forecast of RM65m would be supported by more unit handovers at Melbourne (worth a remainder of c.RM150m after handing over 59/151 units in 1QFY20) and better profit recognition from LRT3 in 2H 2020 when it picks up pace. No dividends as expected.

*For properties in Australia, revenues and profits are only recognised upon handover of units to the buyers. This is unlike Malaysian properties which are recognised progressively along with construction progress of development.

Highlights. 1QFY20 CNP was up 159% QoQ on higher operating profit (+34%) especially from its property segment OP which increased 195% led by higher revenue recognition and better margins (+5ppt) due to the maiden recognitions in 1060 Carnegie Melbourne which has better overall margins compared to its Malaysian developments. Similarly, 1QFY20 CNP was up by 278% YoY, also attributed to the strong performance from its property division.

Outlook. In 1QFY20, MRCB has racked up weaker property sale worth RM36m (-52% YoY) due to Covid-19 and the absence of new launches. Due to the unprecedented crisis, management is deferring launches and reducing their property sales target to RM250-300m (from RM500m).

Current unbilled sales remain healthy at RM1.3b (1.5x cover) while outstanding construction order-book stood at RM21b. While the order book might seem huge, we note that 70% of it (or RM14b) is idling projects from Bukit Jalil Sentral and Kwasa Utama.

No change in earnings post 1QFY20 results.

Maintain OUTPERFORM with unchanged SoP-derived TP of RM0.75. We like MRCB for their status as the largest Bumiputera contractor and the fact that market has built in little expectations on them – providing good odds of outperformance. We also highlight that the undeveloped lands within their balance sheet are “gold plots” - easily monetise-able given their prime locality in already developed/matured areas. Most of these lands are also within transit oriented developments (TODs).

Source: Kenanga Research - 29 Jun 2020