• Still BUY and SOP-derived TP of MYR0.64, 23% upside and c.2% yield. MGB’s FY22 core profit of MYR14.9m (-44.6% YoY) met our and Street estimates at 101% and 100% of full-year projections. We expect the company to see a solid growth of >20% in FY23, backed by better labour conditions with 70% of its c.250 approved worker quota already entering the country, and higher progress billings of certain projects (particularly KITA @ Cybersouth) as the projects move higher along the S-curve.

• Performance review. 4Q22 core net profit of MYR3.8m (-7% QoQ, -64% YoY) was partly due to the sluggish construction progress billings (mainly due to labour shortage) which led to a 27% YoY revenue drop for the segment. Likewise, the EBIT margin for the construction arm contracted to 4.1% in 4Q22 (4Q21: 7.3%) amidst the impact of higher material prices in addition to manpower constraints. Meanwhile, the property development arm saw a >50% jump in revenue during 4Q22 backed by the launches of Laman Bayu phases 3 and 4 with 95% already sold at a project completion rate of 65% as at end 4Q22 (3Q22: 43%).

• Under its MYR1.9bn orderbook as at end 4Q22 (earnings visibility of up to three years), MGB currently has four jobs (cumulative contract value: >MYR500m) related to LBS Bina’s (LBS MK, BUY, TP: MYR0.56) key township development – KITA @ Cybersouth. As such, MGB is seen to be a frontrunner for LBS Bina’s upcoming projects under KITA @ Cybersouth – particularly KITA Bestari, which amounts to 817 units with a total GDV of MYR418m. LBS Bina’s plan to launch 12 projects with a total GDV of MYR2.1bn in CY23 should also benefit MGB’s job replenishment prospects.

• No changes to earnings estimates as earnings were within expectations. We also introduce FY25F earnings with an annual job replenishment target of MYR500m; to be backed mainly by LBS Bina related contracts. All in, our SOP-derived TP remains unchanged at MYR0.64 after factoring in a 0% ESG premium based on our in-house proprietary ESG methodology.

• Valuation is undemanding as MGB is trading at 9x FY23F P/E, or -2SD from the Bursa Malaysia Construction Index’s 5-year mean. We believe this is unjustified given the multiple catalysts – one of these is the c.MYR2.9bn value to supply and install precast products for up to 10k of property units under Saudi Arabia’s Sakani housing programme should the MoU between MGB and Sany Alameriah materialise into a formal contract (expected outcome by end-1H23). Note that our current projections have yet to include this potential job. We also do not discount the possibility of MGB scoring more affordable housing jobs as the Selangor Government targets to build 60k housing units by 2025. Under MGB’s six projects for Rumah Selangorku Idaman consisting 7,210 housing units for which it has secured, we expect at least 30% of yearly revenue contribution from FY23F-25F.

• Key risks include a prolonged period of escalated building material costs and further delays in the Idaman project launches.

Source: RHB Research - 20 Feb 2023