This morning, Macquarie Equities Research (MQ Research) wrote a report on Malaysian Resources Corporation (MRCB) following its 2Q19 financial results released yesterday. MRCB registered lower profits, which was driven by slower-than-expected earnings delivery from the property division. MRCB’s 2Q19 net profit fell 67% to RM11.1mn while its 1H19 revenue of RM475mn missed MQ Research’s estimates by 43%. Yesterday, MRCB’s share price fell 2.0% to close at RM0.740.

Event

• MRCB reported its 2Q19 results with an adjusted profit after tax (PAT) of RM11.1mn (-67% YoY, +178% QoQ) backed by revenue of RM241mn (-41% YoY, +3% QoQ). 1H19 adjusted PAT registered at RM15.2mn (-72% YoY) tracking behind MQ Research and consensus FY19E estimates at 10% and 16%, respectively. 1H19 revenue was at RM475mn (-43% YoY) tracking behind MQ Research and consensus FY19E estimates at 24% and 27%, respectively.

• Weaker result was driven by slower-than-expected earnings delivery from the property division as its key property projects (all high-rise) are now at the stage of constructing the podium, whereby there are earnings that could be recognised at this stage. Further, LRT3 which only commenced work in late 2Q19, have yet to contribute meaningfully to MRCB’s earnings.

Impact

• Property division: The division recorded a total sales of RM244mn as at 2Q19-end, with an unbilled sales of RM1.76bn. The sales recorded is tracking behind management’s target of RM800mn for FY19E but well ahead of MQ Research’s FY19E sales target of RM238mn. The key earnings contributors are now 9 Seputeh and Sentral Suites, which are both at the stage of building the structure’s podium. As construction advances in FY20E, management expects earnings from this division to be much stronger. This is also supported by the delivery of Canergie – MRCB’s residential property project in Australia – between 2Q-3Q FY20E. In 2Q19, MRCB also registered an RM55mn profit from its 30% stake sale of St. Regis Hotel Kuala Lumpur.

• Construction division: As LRT3 had resumed its construction works, MQ Research believes earnings from this segment will only get stronger from this quarter onwards. As at end of 2Q19, its outstanding orderbook stood at RM21.2bn, while MQ Research notes that only approximately 35% of the orderbook are actively contributing to earnings at this juncture, while the rest are still idle. Year-to-date (YTD) order wins stood at RM470mn, still well behind MQ’s estimates of RM5bn in FY19E. MQ Research previously priced in East Cost Rail Link (ECRL) and Klang Valley Double Track 2 (KVDT2) as part of the order wins in FY19E – with MRCB missing out on the KVDT2 package, the order win estimates need to be re-evaluated. However, MQ Research remains confident that MRCB could emerge as one of the key winners of the ECRL packages, which MQ Research expects to begin its awards in November-December 2019.

Action and Recommendation

• Under review.

12-month Target Price Methodology

• MRC MK: RM1.20 based on a Sum of Parts methodology

Source: Macquarie Research - 27 Aug 2019