MRCB’s FY22 results met our forecast but missed consensus estimate. Backed by RM1.5b new launches, it has set a property sales target of RM500m for FY23. The prospect of its construction division is upbeat, underpinned by a tender book of RM30b. We maintain our FY23F earnings, TP of RM0.34, MARKET PERFORM call, and introduce our FY24F numbers.

FY22 core net profit of RM46.8m met our forecast but missed the consensus estimate by 22%.

FY22 revenue more than doubled thanks to: (i) the consolidation of LRT3 contract after it acquired the remaining 50% stake of partner GKENT (previously LRT3 was 50%-equity accounted at MRCB’s JV level), and (ii) recovery from a pandemic-stricken period a year ago. Coupled with stronger margins from both its construction and property development businesses, FY22 core net profit returned to the black.

The key takeaways from its analyst briefing yesterday are as follows:

1. It has set a property sales target of RM500m in FY23 (consistent with our assumption) backed by RM1.5b new launches from: (i) Kwasa Sentral and (ii) Vista Gold Coast, Australia. Looking further into FY24 and FY25, the company has lined up another RM3.5b worth of launches at (i) PJ Sentral, (ii) Bukit Jalil Sentral, (iii) KL Sentral, and (vi) Auckland, New Zealand. With RM488m sales registered in FY22, it has achieved its property sales target (as well as our assumption) of RM500m. However, we are mindful of its tendency to miss targets for new launches. As of FY22, unbilled sales stood at RM537m.

2. YTD, it has secured RM380m worth of construction contracts which is slightly under our full-year assumption of RM500m. At present, its tender book stands at RM30b (based on open tenders) with the key projects being: (i) all three MRT3 civil main contractor packages, and (ii) a power plant in Kulim. Meanwhile, it is currently in negotiations with the Selangor State Government for the reconstruction contract of the Shah Alam Stadium estimated at >RM1b with payment consideration via land swaps.

3. For FY23, progress billings for LRT3 will decelerate upon the completion of major civil works portion and the start of the system works. For FY22, we estimate its effective outstanding construction order book to be RM4.1b (of which RM2.8b is from LRT3). Our estimation is arrived after deducting: (i) idling projects i.e. Bukit Jalil related contracts worth RM11b, (ii) Finas contract worth RM170m, and (iii) Kwasa Utama C8 project from which MRCB only earns a fee. We have penned in RM1b construction replenishment for FY23.

Forecasts. We maintain our FY23F net profit and introduce FY24F numbers implying property sales of RM600m and construction order book replenishment of RM1b.

We maintain our SoP-based TP of RM0.34 (see Page 3) based on 80% discount to its property RNAV, higher than peers’ 60-65% range to reflect the company’s weak execution capabilities and slow turnaround of its landbanks. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 5).

We like MRCB for: (i) its prime plots of matured lands with close proximity to public transportation, (ii) its healthy balance sheet with a net gearing of 0.3x, and (iii) it being well-positioned to secure MRT3 work packages given its track record in public rail projects. However, it does have room for improvement in terms of project execution. Hence, our MARKET PERFORM rating is maintained.

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 - 21 Feb 2023