1HFY21 disappointed due to weaker-than-expected margins from both property and construction segments. In light of the numerous earnings disappointments stemming from weak execution capabilities, our initial thesis of the group (i) monetising their deep-valued land banks and (ii) capitalising its healthy balance sheet to secure potential PFI-related jobs could be in vain as it may not translate into meaningful shareholders’ returns in the near future. After cutting FY21E/FY22E earnings by 377%/25%, we downgrade it to MP (from OP) with lower SoP-TP of RM0.395 (from RM0.65).

Below expectations. 2QFY21 core net loss (CNL) of RM32m dragged 1HFY21 into a CNL of RM27m – way below our and consensus’s full year profit projections of RM11m and RM20m, respectively. Despite already factoring for the FMCO lockdowns imposed in June, losses incurred by its construction division were wider-than-expected while property contributions were not as strong attributable to weaker-than expected margins.No dividends declared as dividends are normally dished out in the 4th quarter.

2QFY21 sales of RM56m led 1HFY21 property sales to RM107m - also below our RM250m target as planned property launches are deferred further in view of the uncertainties. Based on management’s latest guidance, MRCB will only launch the Kwasa Sentral apartments (GDV of RM275m) in 4QFY21 (previously guided at 3QFY21). Consequently, we reduce our FY21E sales target to RM180m. To recap, management had initially guided for RM1b worth of launches (from three developments) in the beginning of the year. Current unbilled sales stood at RM1.0b while outstanding construction order-book stood at RM17.6b.

Highlights. QoQ, 2QFY21 CNL of RM32m plunged from a CNP of RM5.2m due to wider losses in its construction division and weaker profits from its property division attributable to: (i) FMCO, (ii) site closures at construction sites from accidents and (iii) weaker margin project mix. Despite the less stringent MCO, 1HFY21 CNL of RM27m was worse off compared to 1HFY20 CNL of RM1.5m due to the lower revenue recognised (-24%) on lower brought forward unbilled sales of RM1.1b (vs. RM1.6b) and effective outstanding order-book* of RM2.3b (vs. RM3.2b) at the start of the period.

*We derive effective outstanding order-book by deducting (i) idling projects i.e. Bukit Jalil Sentral worth RM10b and (ii) LRT3 which is parked at the JV level from its unbilled outstanding order-book.

Downgrade FY21E/FY22E earnings by 377%/25% on lowered margin assumptions for both construction and property coupled FY21E sales of RM180m (from RM250m).

Our change in view. After numerous earnings disappointment which reveals weak execution capabilities and unreliable earnings delivery, our initial thesis of the group capitalising on their deep-valued land banks and healthy balance sheet to secure potential PFI-related jobs could be in vain as it may not translate into meaningful shareholders’ returns. Consequently, we downgrade MRCB to MP (from OP) with a lower SoP-TP of RM0.395 (from RM0.65) after reducing (i) its FY22 property PBV to 0.2x pegged to -2.0SD below mean (from 0.35x or - 1.5SD) and (ii) lower construction PER of 7x (from 9x).

Source: Kenanga Research - 1 Sept 2021