KEY INVESTMENT HIGHLIGHTS

• 2QFY20 results fell into losses of-RM17.1m, mainly due to the halt in construction progress during MCO period

• As a result, 1HFY20 recorded a marginal loss of -RM1.5m which was below ours and consensus expectations

• Given the current weak consumer and business sentiments, we expect its property division’s performance to be tepid

• Healthy construction order book of about RM20.7b to provide support to the group’s earnings momentum

• Downgrade to NEUTRAL with a new target price at RM0.50

Plunged into losses. Malaysian Resources Corporation Berhad (MRCB)’s 2QFY20 results posted a loss of -RM17.1m. As a result, this led to the group’s cumulative 1HFY20 financial performance to register a marginal loss of -RM1.5m (-109.6%yoy). This was primarily due to the disruption brought on by the movement control order (MCO) on construction and business activities which led to lower progress billings and delayed revenue recognition. Note that the losses were excluding impairment provision of RM202.5m, arising from the COVID-19 pandemic possibly impacting some of the completed projects. This came in below ours and consensus expectations. Moving forward, we expect MRCB’s construction activities to gradually recover in 2HFY20 albeit at a slower pace and subdued property sales.

Nonetheless, revenue growth remains resilient. The group’s 1HFY20 revenue managed to increase by +24.8%yoy to RM592.9m. This is despite the advent of the Covid-19 outbreak and MCO lockdown during the period under review. This was primarily driven by the group’s revenue from the property development and investment of RM336.4m (+115.2%yoy), particularly contributed by the recognition of revenue from ‘1060 Carnegie’ in Melbourne. However, this was partially moderated by the decrease in revenue of RM231.5m (-18.3%yoy) at the construction division as a result of the complete halt in construction works during MCO.

Construction segment to gradually improve at a slower pace in 2HFY20. Given the lower revenue recognition at the construction segment in 1HFY20, the profit before tax (PBT) margin shrank to 6.7% (-23.3ppts yoy). Moving forward, we expect sequential improvement in the financial performance at this division on the partial resumption of work site operations post-MCO albeit not yet regain pace to the preMCO level given the stringent standard operating procedures (SOPs) needed to put in place to curb potential virus outbreaks. This might lead to slower recovery in terms of progress billings in 2HFY20 before potentially rebounding to full operations in FY21. Meanwhile, we opine that the group’s current sizeable outstanding order book of RM20.7, of which 91% are infra-related, to continues to provide support to the group’s earnings momentum in the medium-to-longer term.

Property division to be a cushion. While the group posted a lower 1HFY20 PBT of RM22.6m (-51.9%yoy), this is widely anticipated due to the slower revenue recognition as MCO impeded the construction progress. In addition, the group achieved decent property sales of RM86.0m mainly from the completion of 1060 Carnegie in Melbourne as of 1HFY20. Also, with unbilled sales of RM1.3b, we believe the property segment to book in higher revenue and profit in the 2HFY20 as construction progresses, especially at the Sentral Suites project which makes up 70% of the unbilled sales. Note that the Sentral Suites project is slated to be completed in year-end 2021.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the MCO on the group’s businesses. We are revising our FY20 and FY21 earnings forecast to RM27.7m and RM69.3m respectively as well as introducing our new set of FY22F earnings estimates.

Target price. We are revising downward our TP to RM0.50 (previously RM0.73). We peg a PER of 31.5x to the group’s FY21 EPS of 1.6sen. Note that the PER is +1SD to the group’s two year historical average and we are attaching a premium given the group’s favourable and resilient business mix.

Downgrade to NEUTRAL. In the near term, we expect that the group’s revenue and earnings prospects to remain lacklustre in anticipation of the slower resumption of construction and business activities and limited workforce capacity at work sites in view of the stringent Covid-19 standard operating procedure. This might dampen the earnings prospects in the short-to-medium term as construction progress billings would be affected on slower work progress. On the property segment, we opine that sales to remain subdued given the weak consumer sentiments and avoid big-ticket items in the foreseeable term. Nonetheless, on a longer term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM20.7b which provides long-term earnings visibility. Given the lack of positive near-term catalysts such as the overhang of mega infrastructure projects (e.g. KVMRT3 and KL-SG HSR) and subdued business sentiments, we are downgrading our recommendation on MRCB to NEUTRAL from previously BUY.

Source: MIDF Research - 28 Aug 2020