Construction and engineering services company Malaysian Resources Corporation (MRCB) released its financial results for the first quarter (1Q20), reporting a net profit of  RM15.6m, which more than tripled last year’s RM4.1m, due to the delivery of MRCB’s property project in Melbourne, Australia – the Carnegie development. In its report (29 Jun), Macquarie Equities Research (MQ Research) provides its views, expecting earnings in 2Q20 to be worse than in 1Q20, but could be cushioned by the earnings delivery from the Australian project.

Bullish investors may consider the call warrant MRCB-C64 which was listed just this month.

Conclusion

• MRCB reported its 1Q20 results with adjusted profit after tax (PAT) of RM15.6m (+278% year on year (YoY), +160% quarter on quarter (QoQ)) tracking behind MQ Research estimates at 20% of ’20E but ahead of consensus at 31%. Revenue was at RM426m (+82% YoY, -10% QoQ) tracking ahead of both MQ Research and consensus estimates at 29%. Performance in 1Q20 was stronger due to the delivery of MRCB’s property project in Australia – Carnegie. The handover will continue throughout the year and will support MRCB’s earnings. MQ Research notes that in 1Q20, MRCB’s tax rate was relatively higher at 42% – this caused the miss in earnings. MRCB’s profit before tax (PBT) was at RM27m, tracking at 24% of MQ estimates and 33% of consensus estimates. Neutral rating reiterated.

Impact

• Property: MRCB Land recorded total pre-sales of RM36m in 1Q20, with total unbilled sales of RM1.3bn. With the delivery of Carnegie, MRCB’s earnings in FY20E will be well supported by this project. 1Q20 earnings before interest and tax (EBIT) for MRCB Land was at RM21m (+585% YoY) mainly driven by the Australian project. EBIT margin for this division also increased by 5.2ppts to 8.7% in 1Q20, compared to 1Q19.
• Construction: MRCB Construction’s EBIT was at RM13m (-25% YoY) with EBIT margin of 7.2%, 5.4ppts lower than that of last year. Orderbook remains healthy with RM20.7bn unbilled balance. MQ Research priced in RM1bn of order win for MRCB in FY20E but MQ Research thinks there is a significant downside risk to its estimates, given the impact of Covid-19 on the construction sector, primarily the timing of infra project awards.
• Balance sheet: MRCB’s overall net debt has been on steady upward trend since 1Q19, from RM1.1bn to RM1.4bn in 1Q20, taking the net gearing level from 23% to 29%. In mid-June, MRCB launched a Sukuk program to raise up to RM5bn. While the drawdown will be staggered, MQ Research expects net gearing to gradually increase, going forward.

Action and Recommendation

• MQ Research will be monitoring a few key developments in MRCB before potentially turning more positive on the company – 1) meaningful rollouts of Bukit Jalil Sentral, Semarak City and Kwasa Damansara projects; 2) inventory pare down; and 3) potential awards of infra projects. MQ Research expects earnings in 2Q20 will be worse than in 1Q20, but it could be cushioned by the earnings delivery from the Australian project. Neutral rating reiterated.

12-month Target Price Methodology

• MRC MK: RM0.50 based on a Sum of Parts methodology

Source: Macquarie Research - 29 Jun 2020