• Keep BUY, new MYR0.40 TP (SOP) from MYR0.45, 32% upside and c.2% yield. 1Q23 core profit of MYR8.5m (-40% YoY) missed expectations – at 14% and 16% of our and Street’s full-year estimates. The negative deviation was on slower-than expected construction project billings. Looking ahead, we estimate a 5-year earnings CAGR of >20% with commendable job prospects – ie three bids submitted for Mass Rapid Transit 3 (MRT3) – and ongoing overseas property launches.

• Performance review. Malaysian Resources Corp’s construction wing saw a 72% YoY drop in 1Q23 EBIT due to the completion of key projects in late 2022, eg Damansara-Shah Alam Elevated Expressway (DASH) Package CB2. Nevertheless, the bulk of this arm’s profit was contributed by the Light Rail Transit 3 (LRT3) project, which has reached 78% financial progress as at end 1Q23. The remaining quarters should see LRT3 system works ramping up. MRC’s property arm recorded a 58% YoY EBIT growth for this period, as the Sentral Suites project achieved 100% construction progress. The handover of the completed vacant possession units to purchasers is commencing in stages from April onwards.

• Outlook. MRC’s outstanding construction orderbook as at end 1Q23 stood at MYR6bn – excluding the Bukit Jalil Sentral project. This provides c.3 years’ of earnings visibility with 42% coming from LRT3. We continue to reiterate the group’s advantage in terms of MRT3 bids (MYR30bn in its tenderbook) given its status as one of the largest bumiputera contractors here. MRC has also been pre-qualified for a flood mitigation project in Selangor and is still evaluating the land offered by the Selangor Government in return for the Shah Alam Stadium’s redevelopment works.

• We cut our FY23F-25F earnings by 14%, 12%, and 8% to factor in a more conservative progress billings timeline. Post the earnings adjustment and rolling forward our valuation base year to FY24 from FY23, we arrive at a new SOP-derived MYR0.40 TP, which is given a 0% ESG premium/discount on its intrinsic value based on an unchanged ESG score of 3.0. We favour MRC for diversifying its property arm into industrial properties – eg the Ipoh Raya Integrated Park – and new overseas markets like Australia and New Zealand (total GDV: >MYR1.5bn). An upcoming catalyst for MRC, in our view, will be the potential re-instatement of omitted works for LRT3 worth c.MYR1bn. Key downside risks include a prolonged slowdown in the property market and regulatory risks impacting project timeline rollouts and costs.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 30 May 2023