9MFY20 CNL of RM0.5m came below expectations due to weak property sales, low construction productivity bogged down by lockdown compliance and weak LRT3 contributions. We dial back our FY20/21E earnings by 87%/46% and lower our SoP-TP to RM0.65 (from RM0.75). However, no change to our OP rating as we believe the Covid-19 recovery narrative will grow in prominence moving forward which will benefit contractors like Mrcb.

Below. 3QFY20 CNP of RM0.9m (-63% YoY) brought 9MFY20 core net loss (CNL) to RM0.5m – disappointing both our and consensus CNP expectations of RM49m and RM32m. 9MFY20 property sales of RM126m also fell short of our RM300m full-year target.

Construction the main culprit for underperformance. Besides the lower-than-expected property sales, the negative deviation also stemmed from: (i) weaker-than-expected construction which registered losses due to sub-optimal productivity from lockdown compliance, and (ii) lower-than-expected contributions from LRT3 which only racked up RM1.6m PAT for 9MFY20 vs. our full-year projection of RM5m as renegotiations* with subcontractors have not been fully completed – leading to less than ideal profit recognition. No dividends as expected.

Sequentially stronger as it emerged from the worst lockdown. 3QFY20 CNP of RM0.9m returned to the black from a RM17m loss in 2QFY20 as it was not bogged down by a 2-month MCO in the previous quarter. Dissecting the quarter further, both property and construction segments recorded stronger revenue by 53% and 133%, respectively, as work progress increased. Consequently, both divisions’ operating profits improved accordingly, lifting overall operating profit to RM16m from RM9m loss in the previous quarter.

YoY boosted by property. Despite the Covid-19 pandemic, 9MFY20 core net loss of RM0.5m actually improved from RM37m CNL posted in 9MFY19 mainly attributed to its property division which posted higher revenue and margins from: (i) recognition of Melbourne Carnegie 1060 in FY20, and (ii) higher degree of advance billings for Sentral Suites.

Current unbilled sales remain healthy at RM1.2b (1.5x cover) while outstanding construction order-book and tenderbook stood at RM21b and RM2.6b respectively.

Earnings downgrade. Post results, we slash FY20/21E CNP by 87%/46% to RM6.2m/RM55.7m after accounting for: (i) lower FY20/21E sales of RM165m/RM265m (from RM300m/RM450m), (ii) weaker construction margins, and (iii) deferred LRT3 profit recognition into later years. While we expect 4QFY20 to perform better on more settlement at Carnegie 1060 (104/141 settled as of 9MFY20), we note that there were intermittent work stoppages faced at Kwasa, Sentral Suites and 9 Seputeh where Covid-19 cases were detected onsite - impeding optimal construction productivity.

Maintain Outperform on lower SoP-TP of RM0.65 (from RM0.75) post earnings adjustments and lowered construction PER to 9x (from 12x) to reflect the uncertain construction profits. While the results were unsatisfactory, we believe the Covid-19 recovery narrative will gradually grow in prominence moving forward and lift the construction sector as a whole. Being the largest Bumiputera-led contractor in Malaysia, we believe MRCB would naturally be a beneficiary of pump-priming initiatives yet to come – hence, we still believe the upside potential still outweighs the downside risks at current share price levels.

Source: Kenanga Research - 24 Nov 2020