MRCB’s 1HFY22 CNP missed expectations on weak property margins and unexpected associate losses, despite sales beating expectations upon the launching of VIVO 9 Seputeh in 2Q. We raise our FY22F sales assumption by two-thirds to RM500m but reduce the margins. We cut our FY22F net profit by 44%, lower our SoP-based TP by 9% to RM0.34 (from RM0.375) after rationalising our property segment’s valuation to RNAV from PBV. Maintain MARKET PERFORM.

Below expectations. 1HFY22 CNP missed expectations at only 20% of our full-year forecast and 23% of full-year consensus estimates. The variance against our forecast came largely from sub-par property margins and losses from 49%-owned associate UEMB-MRCB JV.

YoY, 1HFY22 revenue more than tripled thanks to its construction division which fully consolidated the LRT3 contract upon acquiring GKENT’s 50% stake (previously LRT3 was 50%-equity accounted at MRCB’s JV level) and recovered from a pandemic stricken period a year ago. Consequently, 1HFY22 CNP returned to the black from losses.

Outlook. 1HFY22 sales of RM250m came above our full-year assumption of RM300m (but within its internal target of RM500m) due to strong sales from the RM188m VIVO 9 Seputeh development (completed commercial units) launched in 2QFY22. For the rest of the year, MRCB will be launching Kwasa Sentral Plot F (RM328m GDV) and Bandar Seri Iskandar (RM30m GDV). The company is deferring the launch of its Australian project (worth GDV of RM900m) to FY23. Given the weak sales over the past four years, its unbilled sales have depleted to RM707m as at end- 2QFY22 (vs. a peak of RM1.76b in 2QFY19).

YTD contract wins stood at RM380m. MRCB is currently tendering for all three MRT3’s civil main contractor (CMC) packages where awards are anticipated to be out in early-FY23. We maintain our RM500m replenishment target. We estimate that as at end- 2QFY22, its effective construction outstanding orderbook stood at RM5.2b (of which RM3.8b is from LRT3).Our estimation is arrived at after deducting: (i) idling projects i.e. Bukit Jalil-related contracts worth RM11b and Finas worth RM170m, and (ii) Kwasa Utama C8 contract worth RM2.9b from which MRCB only earns a fee.

Forecasts. We cut our FY22F net profit by 44% largely to reflect reduced property margins, which are partially cushioned by our revised FY22F sales assumption of RM500m which is two-thirds higher than before. We also lower our SoP-based TP by 9% to RM0.34 (from RM0.375) after: (i) rationalising its property segment’s valuation to RNAV (at an 80% discount due to low realisability of its GDV) from PBV, and (ii) updating our TP for SENTRAL (UP; TP: RM0.79). There is no adjustment to our TP based in ESG given a 3-star rating as appraised by us (see Page 5). While MRCB is poised to benefit from the potential rollout of public infrastructure projects ahead of the 15th General Election, there is room for improving its project execution to ensure delivery of earnings. Maintain MARKET PERFORM.

Risks to our call include: (i) sustained weak flows of construction jobs from both the public and private sectors, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rising cost of building materials.

Source: Kenanga Research - 1 Sept 2022