2QFY20 CNL of RM17m dragged 1HFY20 to a CNL of RM1m. This is within consensus but below ours as we do not foresee 2HFY20 achieving our initial profit target of RM65m given the lockdowns in Melbourne would impede further settlement for 1060 Melbourne Carnegie. Hence, reducing FY20/21E earnings by 25%/7%. Nonetheless, we continue to like the name for their status as the largest Bumiputera contractor and prime land banks. Maintain OP with an unchanged SoP derived TP of RM0.75.

Below ours but within consensus. 2QFY20 core net loss (CNL) of RM17m dragged 1HFY20 to a slight loss of RM1m – within consensus profit estimate of RM42m but below our RM65m target. We deem the results below ours as we believe 2HFY20 may no longer be strong enough to achieve our profit target. This is because our previous 2HFY20 assumption hinges strongly on the settlement of 1060 Melbourne Carnegie units which have encountered some hiccups as the worsening Covid-19 situation there led to a second lockdown beginning 7th July 20. This has caused some withdrawal in sales and could also impede settlement for the project. No dividends as expected. We derive our core net loss figure after stripping off RM202.5m worth of impairments on trade receivables. A majority of this impairment (RM197m) is derived from a construction client in the hospitality sector which MRCB feels may not have the capacity to pay back for the completed hotel project built. Management assures no more impairments moving forward.

Highlights. QoQ, 2QFY20 dipped into a core net loss of RM17m (from RM16m profit) stemming from the longer MCO lockdown of 2 months’ vs 2 weeks. 2QFY20 also saw less unit settlement of 1060 Carnegie – with only 20 units settled compared to 59 units in 1QFY20. Meanwhile, 1HFY20 actually improved to a CNL position of RM1m from a CNL position of RM40m despite the lockdowns as: (i) 1HFY20 had a lump sum recognition from 1060 Carnegie which was completed in Dec 2019 and (ii) 1HFY20’s construction segment did not suffer any cost overruns seen in 1HFY19.

Outlook. In 1HFY20, MRCB has racked up property sales worth RM86m. 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.

Post results, we defer some settlements of 1060 Melbourne Carnegie to FY21 and also dial back on the margins to cater for additional marketing costs required to sell the units which sales were withdrawn. Consequently, reduce FY20/21E estimates by 25% and 7% respectively.

Maintain OUTPERFORM with unchanged SoP-derived TP of RM0.75. Despite this quarters set back, we continue to 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 matured areas.

Risks to our call include: (i) lower-than-expected property sales, (ii) snap elections, (iii) resurgence of Covid-19, and (iv) tighter lending environment.

Source: Kenanga Research - 28 Aug 2020