MRCB’s 1HFY24 earnings exceeded expectations, mainly due to chunky showing from the construction division making good progress. Order book replenishment of its construction division will be underpinned by a tender book of RM34b. Meanwhile 1HFY24 property sales of RM497.4m are on track to meet its RM800m target backed by RM1.9b of new launches. We raise our FY24F earnings by 36%, raise TP by 82% to RM0.62 (from RM0.34), and upgrade to OP (from MP) as we like the stock for its participation in, and ability to secure, high value construction projects.

1HFY24 core net profit of RM54.2m exceeded our forecast at 88% and 128% of our full-year forecast and full-year consensus estimates, respectively. The variance came largely from better-than-expected construction margins, thanks to more aggressive progress billing for the LRT3 and Muara Sg Pahang Phase 3 flood mitigation projects.

YoY, revenue slid 37% on lower contributions from its engineering, construction, and environment arm on lower billings related to LRT3 that has achieved 96% progress and Muara Sg Pahang Phase 2 flood mitigation project in 2QFY24. However, the segment’s operating margins multiplied to 16.5% (+11.9 ppts), thanks to higher margins enjoyed during the tail-end of these projects that mostly contributed to the 180% leap in 1HFY24 earnings.

Separately, we note that MRCB’s property development segment reported losses due to lumpier handovers in 1HFY23 for the Sentral Suites completion where the year was mostly supported by unsold units there.

QoQ. Due to lower billings related to LRT3 and flood mitigation project, 2QFY24 revenue declined by 22% but net profit surged by c.1,600%. We gather that 1QFY24 was also hampered by higher effective taxes which could have partially reversed during the current period.

The key takeaways from its analyst briefing are as follows:

1. It achieved RM497.4m (+97% YoY) property sales in 1HFY24, on track to meet its internal sales target of RM800m (which is consistent with our assumption). As at end-1HFY24, its unbilled sales stood at a low of RM558.7m.
    
2. On its engineering, construction, and environment arm, YTD, the group was awarded the Phase 2 Sungai Langat flood mitigation project with contract value of RM250m, with target completion within six years. Under negotiation with value amounting to RM4.0-RM5.0b are construction projects of five LRT3 stations and other related infra, redevelopment of Stadium Shah Alam, and redevelopment of KL Sentral Station. We anticipate its operating margins to ease from 1HFY24 high base as progress works for the other projects kick in.
    
3. At present, its tender book stands at RM34b per the company, where MRCB also noted its key projects being: (i) Penang Airport Expansion, and (ii) Pan Borneo Package (24-km stretch), and (iii) MRT3, among others.

Forecasts. We raise our FY24F earnings by 36%. Also incorporating updated valuation assumptions, we raise TP by 82% to RM0.62 (from RM0.34) and upgrade it to OP (from MP) as we like the stock for its participation in, and ability to secure, high value construction projects.

We also raise our SoP-based TP by 82% to RM0.62 (from RM0.34) based on a 70%discount to its property RNAV (from 80%), to reflect the company’s execution capabilities and turn-around of its land banks. We had also refreshed our applied FY25F PER for the construction sector to 15.0x (from 10.0x), being at a discount from large-cap peers’ x PER valuations ascribed from the sector’s re-rating in line with more investment-driven projects. 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 matured lands that are close to public transportations, and (ii) it being well-positioned to secure MRT3 work packages given its track record in public rail projects. However, there is room for improvement in terms of project execution. Upgrade to OUTPERFORM from 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 - 3 Sep 2024