• Still BUY, new SOP-derived TP of MYR0.75 from MYR0.83, 32% upside with c.2% FY22F yield. We remain upbeat on MGB despite some near- term headwinds. It should continue to benefit from the construction orders from LBS Bina (LBS MK, BUY, TP: MYR0.64), combined with the Rumah Selangorku Idaman (Idaman) projects by the Selangor State Government which could exceed the current 7,210 units in the coming years. Valuations are undemanding – the counter is trading at a 12-month forward P/E of 6.5x, or -1SD from the 5-year mean.

• Near-term headwinds. The current labour shortage faced by contractors including MGB may see progress billings being delayed. We gathered that MGB has received approval from the authorities to hire foreign workers, but the arrival of labour could occur in stages – probably for the next 3-6 months. While penalties will be imposed for project delays, MGB has a practise of planning to finish projects approximately nine months ahead of the scheduled completion in a normal scenario. Therefore, this should provide enough buffer in view of the current labour shortage.

• Update on MGB’s development projects. One of its own housing development projects, Zenit Molek (GDV: MYR366.5m) in Johor, is a high- rise development comprising 988 affordable housing units priced at MYR313k and upwards apiece. Management initially guided the launch for the project to be within 1H22, but we now conservatively assume that this may take place only in early FY23. This is due to the fact that the high-rise residential segment remains lacklustre in Johor, and characterised by low demand at present. According to Knight Frank, only one notable project was launched in 1H22 – Optimus Medini in Iskandar Puteri.

• 2Q22 results preview. Considering the aforementioned headwinds, we expect 2Q22 net profit to decrease QoQ to MYR4-5m. In 1Q22, MGB recorded a core net profit of MYR7m (-34% YoY, -37% QoQ) from the higher cost of sales (+8.6% YoY) and labour shortages.

• That said, its booking-to-sales conversion for the fully-booked Idaman BSP (launched in late FY21) has reached c.50%. For the rest of the year, we believe MGB is on track to replenish jobs from LBS Bina worth c.MYR450m (YTD job replenishment: MYR225m). This should further boost its outstanding construction orderbook of MYR2.1bn, which should provide earnings visibility over the next three years.

• We trim FY22-24F earnings by 6-14% after adjusting the recognition of progress billings from construction projects amid the labour shortage and imputing the delay of Zenit Molek’s launch. As such, our SOP-derived TP drops to MYR0.75 (with a 0% ESG premium pencilled in). Our target construction FY23F P/E is 13x, +0.5SD from the KLCON’s forward P/E. This is justified, given the multiple catalysts – Selangor’s aim to build 30,000 affordable homes by 2025 and the Kerteh Bio-Polymer Park. Key downside risks include a prolonged labour shortage, a spike in building material costs, and further delays in Idaman project launches.

Source: RHB Research - 3 Aug 2022