1QFY21 CNP of RM5.2m disappointed due to weaker-than expected margins from its construction division, and our overly optimistic recovery projections which is unlikely to pan out now given the fresh lockdowns. 1QFY21 sales of RM52m is also considered below our RM600m target as management scaled back earlier planned launches of RM1b. Slash FY21E/FY22E earnings by 82%/37% but keep OP on unchanged SoP-TP valuation of RM0.65 (base rolled forward). Still sees value in the name for its prime landbanks and potential to spearhead PFI related projects.

Below expectations. 1QFY21 CNP of RM5.2m came below expectations accounting for 9%/14% of ours/consensus full-year estimates. This negative deviation stems from: (i) weaker-than-expected margin from its construction division, and (ii) our overly optimistic recovery projections which is unlikely to pan out now given the fresh lockdowns (MCO 3.0 and FMCO) imposed which would impede productivity. No dividends declared as dividends normally dished out in the 4th quarter.

1QFY21 property sales of RM52m is also deemed below our RM600m target as management has indicated that they may no longer launch the full RM1b properties initially set out in FY21 given the lingering uncertainties. To recap, MRCB had previously planned to launch: (i) Kwasa Sentral apartments (RM275m GDV), (ii) Lot J @ KL Sentral (RM229m GDV), and (iii) Tower 5 at PJ Sentral (RM524m GDV).

However, the only development they are committed to launch this year now would only be the Kwasa Sentral apartments. Consequently, we downgrade our FY21E sales to RM250m (from RM600m) but raise our FY22E sales to RM580m (from RM400m) in view of MRCB deferring the launches. Current unbilled sales stood at RM1.0b (1.5x cover) while outstanding construction order-book stood at RM20.3b.

Highlights. QoQ, 1QFY21 CNP of RM5.2m rebounded from a core net loss position of RM0.3m mainly due to lower income tax by RM5.8m (- 76%). Meanwhile, 1QFY21 CNP declined 67% YoY attributable to the lower revenue registered from both its construction (-52%) and property division (-44%). The property division revenue was lower because 1QFY20 was the quarter whereby 1060 Carnegie (Melbourne) was completed and saw higher settlement number of 59 units vs 7 units settled in 1QFY21. Meanwhile, its construction division revenue recognition is sub-optimal due to MCO 2.0 which led to losses at the operating levels.

Slash FY21E/FY22E earnings by 82%/37% on lowered construction margins and progress billings to cater for the FMCO lockdowns coupled with lower FY21E sales of RM250m (from RM600m).

Call and TP. While we cut earnings in a major way this quarter, we continue to keep our OP call on unchanged SoP-TP of RM0.65 after rolling valuation base year forward. We reiterate our stance that there is immense value in MRCB’s land banks, located within prime areas and strongly believe that its healthy balance sheet (0.26x gearing as of 1QFY21) and Bumiputera contractor status gives them good potential to spearhead PFI-related projects.

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 - 1 Jun 2021