INVESTMENT HIGHLIGHTS

• 1HFY17 results below the line

• Earnings bore the brunt of gushing OPEX

• But future earnings still visible

• Altogether, we maintain our BUY stance with an adjusted TP of RM1.36 per share

1HFY17 results below the line. MRCB’s 1HFY17 PATAMI of RM33.8m (-30%YoY) came in below expectations accounting for a dismal 10.1% and 26.9% of ours and consensus’ estimates respectively. However, MRCB revenue surged from RM825.2m in 1H16 to RM1.28b in 1H17 (+55.3%YoY) led by increase in both revenues of property segment of RM698.8m (+85.5%YoY or 54.5% of TR*) and construction segment; RM485.4m (+46.0%YoY or 37.8% of TR).

Earnings bore the brunt of gushing OPEX. The deviation of insipid earnings and surging revenue are attributable to swelling operating expenses (OPEX). OPEX grew consequently from RM751.2m in 1HFY16 to RM1.18bn (+57.5%YoY) currently. We see the growth is consequent of OPEX intensity to complete projects, i.e. refurbishments and construction of Stadium Bukit Jalil in KL Sports City, Sentral Residences, PJ Sentral towers (Celcom, MyIPO, MBSB) within time. We are expecting ~15.5%-20.0% increase in OPEX from 1HFY16 but not as high as the current rate. The OPEX current level is critical for us to follow closely as its materiality is 92.3% to revenue.

But future earnings still visible. Having said that, we are confident on MRCB’s earnings visibility for FYE17/FYE18. Moreover, its orderbook of RM5.6bn (excluding fee based contracts of RM600m) stretches to 2027 implying a healthy earnings visibility. Turning to our forecasts, we will be moved to change our assumptions if OPEX continue to persist above ~85.0% of MRCB’s total revenue for the next 2 consecutive quarters. Thus, MRCB’s results for 9MFYE17 are a critical juncture to start reassessing whether our assumptions for FYE18/FYE19 holds water.

Recommendation. To reflect the changes in its capital structure we adjust our SOP by fine-tuning debt value*, enlarged share capital* and cash position* to arrived at our BUY recommendation with an adjusted SOP-based TP of RM1.36 per share. Our TP implies a +15.5% upside and +9.6% earnings yield with +5.68% spread against 10Y-MGS yield of 3.92%.

Source: MIDF Research - 30 Aug 2017