• Still BUY, new SOP-derived MYR0.83 TP from MYR0.99, 32% upside, c.2% FY22F yield. MGB’s 1Q22 results missed our and Street’s expectations due to higher-than-expected building material costs. Nevertheless, MGB should continue to benefit from economies of scale at its industrialised building system plant, backed by construction orders from LBS Bina (LBS MK, BUY, TP: MYR0.63) and the Rumah Selangorku Idaman (Idaman) projects by the Selangor state government. As such, we forecast >30% earnings growth despite lingering cost headwinds.

• Missed expectations. MGB’s 1Q22 core net profit of MYR6.6m (-34.1% YoY, -37.1% QoQ) was due to higher cost of sales (+8.6% YoY). This constituted only 12% of our and consensus’ full-year forecasts, falling short of expectations. In deriving our core net profit, gains on disposals of subsidiaries and impairment losses on receivables were excluded. The construction segment reported higher 1Q22 revenue of MYR174.0m (+11.8% YoY), backed by sales recognised for Residensi Bintang and Mercu Jalil at Bukit Jalil, as well as Ritma Perdana and Melodi Perdana at Alam Perdana. However, the construction segment’s PBT margin contracted by 2ppts YoY to 6.3% during the quarter, amid the rise in building material costs and the labour shortage which affected the progress of projects. The property segment recorded lower 1Q22 EBIT which fell by 58.2% YoY to MYR0.6m as the new phases of Laman Bayu 3 and 4 are still in early construction stages despite encouraging bookings.

• MGB’s outstanding construction orderbook as of 31 Mar, stands at MYR1.74bn, and should provide earnings visibility over the next three years. Meanwhile, the trend of high building material costs should continue until 2023. In view of this, MGB is managing the situation by leveraging on their long-term relationships with suppliers, to negotiate for reasonable prices. MGB is also using more steel wire mesh in constructing buildings – these are less expensive than steel bars.

• FY22-FY24 earnings forecasts revised by -32.5%, -30.4%, and +20.2% after: i) Imputing lower margin assumptions to reflect higher material costs; and ii) revising the revenue recognition timeline after the slight delay in Idaman project launches. As a result, we obtained a new SOP-derived MYR0.83 TP, after factoring in a 0% ESG premium/discount based on our proprietary methodology. This also follows our valuation base being rolled forward to FY23F. Our target construction FY23F P/E is 13x, +0.5SD from the KLCON’s forward P/E. This is justified, in our view, given the multiple catalysts that could bring earnings upside, such as the Idaman projects and Kertih Bio-Polymer Park. Key risks: Prolonged period of escalated building material costs, and further delays in Idaman project launches.

Source: RHB Research - 18 May 2022