MRCB’s 9MFY22 results beat our forecast (due to strong profits from the sale of completed commercial units in Vivo 9 Seputeh) but met market expectations. It has lined up RM4.5b worth of property launches in the next two years with promising job win prospects underpinned by a tender book of RM30b. We raise our FY22-23F earnings by 60-44% but keep our RNAV-based TP of RM0.34. Maintain MARKET PERFORM.

9MFY22 core net profit of RM34m already exceeded our full-year forecast by 21% but met market expectations at 64% of the full-year consensus estimate. The variance against our forecast came largely from stronger-than-expected profits from the sale of its completed commercial units in Vivo 9 Seputeh (worth RM165m).

9MFY22 revenue more than quadrupled thanks to: (i) its construction division which fully consolidated the LRT3 contract upon acquiring GKENT’s 50% stake (previously LRT3 was 50%-equity accounted at MRCB’s JV level), and (ii) recovery from a pandemic-stricken period a year ago. Alongside stronger margins from its construction and property development business, 9MFY22 core net profit returned to the black from losses.

The key takeaways from its analyst briefing yesterday are as follows:

1. With 9MFY22 sales of RM342m, it is on track to meet our FY22F property sales assumption as well as its own internal target of RM500m. For the rest of the year, the company has no further planned launches. However, moving into FY23-24, it has lined up RM4.5b worth of launches at (i) Kwasa Sentral, (ii) KL Sentral, (iii) PJ Sentral, (iv) Bukit Jalil Sentral, (v) Gold Coast, Australia, and (vi) Auckland, New Zealand. While the launch pipeline is huge, we note that MRCB has the tendency to defer and miss launch targets.

2. It has secured RM380m worth of construction contracts YTD which is within our full-year assumption of RM500m. At present, its tender book stands at RM30b (based on open tenders) with the key projects being: (i) all the three MRT3’s civil main contractor packages, and (ii) a power plant in Kulim. At the same time, the company is also eyeing projects through direct negotiation comprising: (i) a flood mitigation project, (ii) the Shah Alam Stadium refurbishment project, and (iii) a waste-to-energy power plant.

3. In 3QFY22, MRCB’s construction progress for LRT3 was impeded by the underperformance from certain work package contractors in which MRCB had to step in for rescue works. This explains the sequentially weaker construction revenue and margins during the quarter. MRCB remains confident that it will still achieve the targeted 80% physical completion by year-end (vs. 77% at present).

Forecasts. We raise our FY22 and FY23F net profit by 60% and 44%, respectively, to reflect higher property margins arising from further sales of high margin commercial units. MRCB currently has c.RM95m worth of commercial units left in Vivo 9 Seputeh (RM30m) and Sentral Suites (RM65m).

We maintain our SoP-based TP of RM0.34 (see Page 3) based on an 80% discount to its property RNAV, higher than peers’ 60-65% range to reflect the company’s weak execution capabilities and slow turnaround of its land banks. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We like MRCB for: (i) its prime plots of matured lands with close proximity to public transportations, (ii) its healthy balance sheet with a net gearing of 0.3x, providing gearing headroom for taking on PPP/PFI projects, and (iii) it being well-positioned to secure MRT3 work packages given its track record in public rail projects. However, it certainly has room for improvement in terms of project execution. Maintain MARKET PERFORM.

Risks to our call include: (i) sustained weak flows of construction jobs from both the public and private sectors, (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD), and (iii) rising cost of building materials.

Source: Kenanga Research - 1 Dec 2022