• Downgrade to SELL from Neutral, new TP of MYR0.43 from MYR1.04, 20% downside with 4.6% yield. We believe valuations will remain depressed amidst prevailing macroeconomic risks, weak market sentiment and dash for cash liquidation activities. We note the lack of visible re-rating catalysts given the unfavourable ripple effect caused by the recent oil price collapse, leading to potentially reduced infrastructure spending by the Government and unclear policy imperatives.
• Results preview. 4QFY20F (Jan) earnings are expected to come in weaker than initial expectations. We believe the earnings will be constrained by the deferment of progress billings from the JV for the Light Rail Transit (LRT) 3 turnkey project (as reflected in its JV partner MRCB – 4Q19 PAT loss of MYR0.64m). The construction and water metering segments are expected to remain fairly stable in 4Q. However, we toned down our 4Q forecast revenue for these segments to MYR60m and MYR27m respectively. Taken together, we expect 4QFY20 core net profit of MYR10.4m (+0.9% QoQ, - 58% YoY), which brings FY20F core net profit to MYR45.2 (-48% YoY).
• Water meter segment could see lower FY21F earnings. The water meter manufacturing plant has achieved a c.80% utilisation rate, with 2.4m units of water meters supplied in FY19 (FY18: 2.4m units). We understand that the company has complied with the 4-week Movement Control Order (MCO) set out by the Prime Minister’s Office, and has shut down its manufacturing plant. We expect the impact to be manageable at this juncture, but we note that any further extension in the shutdown period would lead to delays in the supply chain.

• Downgrade to SELL. We lower our earnings for FY20F-FY22F by 3.5%, 17% and 10%, as we expect contribution from water meter manufacturing and the LRT3 project to be lower than previously assumed. We reduced our construction award win assumption to MYR150m pa (from MYR300m) for FY21F-22F, and ascribe a target P/E multiple of 4.5x to its FY21F earnings (from 9x, -1.1 SD from its 5-year mean forward P/E) to reflect the challenging backdrop, delay risk for its water manufacturing segment due to regional disruption, and lack of visible re-rating catalysts. Our target valuation implies a 0.46x P/NTA (-0.93SD from 5-year mean, low: 0.2x during the Asian Financial Crisis in 1998). We note that the strong share buyback initiatives and net cash position (MYR0.33/share at end-3QFY20) may offer support to the share price, although net cash is diminishing.

• Key upside risks include stability in macro economy, positive outcome for water reform – paving the way for higher sector development allocations, higher-than-expected earnings contribution from the LRT3 project and further wins in water-related infrastructure construction.

Source: RHB Securities Research - 27 Mar 2020