MRCB’s 1QFY23 earnings met our forecast but missed market expectation. 1QFY23 property sales of RM85m are on track to meet our RM500m target backed by RM1.5b of new launches. Meanwhile, order book replenishment of its construction division will be underpinned by a tender book of RM30b. We maintain our forecasts, TP of RM0.34, and MARKET PERFORM call.

1QFY23 net profit of RM8.5m met our forecast at 26% of our full-year forecast but missed market expectation at only 11% of the full-year consensus estimate.

1QFY23 revenue slid 8% on lower jobs in hand upon the completion of DASH highway a year ago. However, its core net profit fell by a larger 40% due to: (i) higher interest costs (+20%) on higher borrowings and interest rates, (ii) lower associate income from SENTRAL REIT (-51%), and (iii) a higher effective tax rate (+2ppts).

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

1. It achieved RM85.1m property sales in 1QFY23, on track to meet its internal sales target of RM500m (which is consistent with our assumption). In Apr 2023, it launched its “26 Vista in Surfers Paradise” apartment project in Gold Coast, Australia with a GDV totalling AUD391m (RM1.2b) and targets to launch ResidensiTujuh in Kwasa Sentral (GDV of RM329m) by the end of the year. As at end-1QFY23, its unbilled sales stood at a low of RM220m.

2. Its immediate priority is to monetise completed unsold stock which stood at RM379m as at end-1QFY23. It expects foreign buyers to return following the opening of international borders.

3. YTD, it has yet to secure any new construction job against our full year assumption of RM1b. At present, its tender book stands at RM30b (based on open tenders) with the key tenders being: (i) all the three MRT3 main civil contractor packages, and (ii) a power plant in Kulim.

4. It is in negotiations with the Selangor State Government for the reconstruction contract of the Shah Alam Stadium with payment consideration via land swaps. As at end-1QFY23, we estimate its effective outstanding construction order book to be RM3.4b (of which RM2.5b is from LRT3). Our estimate 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.

Forecasts. Maintained.

We also 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 land banks. 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 matured lands at close proximity to public transportation, and (ii) it being well-positioned to secure MRT3 work packages given its track record in public rail projects. However, there is room for improvement in terms of project execution. 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 - 30 May 2023