INVESTMENT HIGHLIGHTS

• 9MFY17 results dissapointing

• Earnings still bore the brunt of torrential OPEX

• In the midst of revising earnings

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

9MFY17 results disappointing. MRCB’s 9MFY17 PATAMI of RM61.9m (-21.8%YoY) came in below expectations accounting for a dismal 18.7% and 56.9% of ours and consensus’ estimates respectively. However, MRCB revenue surged from RM1.37bn in 9MFY16 to RM2.4b in 9MFY17 (+75.5%YoY) led by increase in revenues of construction segment; RM1.6bn (+236.7%YoY or 66.6% of total revenue).

Earnings still bore the brunt of torrential OPEX. The deviation of insipid earnings and surging revenue are attributable to unwavering operating expenses (OPEX) which sprouted aggressively from previous quarter. OPEX grew consequently from RM1.37bn in 9MFY16 to RM2.2bn (-83.4%YoY) currently. Opex growth is influenced by sheer scale of project mobilization for various projects such as MRT2 V210 Package, Kwasa Land, PR1MA (Kajang & Brickfields) and upcoming the Damansara-Shah Alam Highway (DASH). The OPEX current level is critical as its materiality is 91.6% to revenue consequently influences our earnings assumptions for FYE18 and FYE19.

In the midst of revising earnings. That said, we are in the midst of revising MRCB’s earnings assumptions for FYE18/FYE19. Although, its unbilled orderbook is RM5.3bn (excluding fee based contracts of RM600m) denoting a positive earnings visibility, we reckon that balancing a swelling orderbook, launching property projects in Australia and KL’s prime area - coupled with an increasing OPEX is a tough call. We believe that the juncture to assess MRCB’s competitive advantage have arrived due to positive news of EDL’s disposal but dragged by staunch OPEX.

Recommendation. We maintain our BUY recommendation with an SOP-based TP of RM1.36 per share. Our TP implies a +33.1% upside and +7.4% earnings yield with +3.44% spread against 10Y-MGS yield of 3.96%.

Source: MIDF Research - 22 Nov 2017