This article first appeared in The Edge Financial Daily on March 2, 2020

Malaysian Resources Corp Bhd
(Feb 28, 57 sen)
Reiterate hold with a lower target price (TP) of 70 sen: Malaysian Resources Corp Bhd (MRCB) saw a core net loss of RM34.3 million excluding a RM58 million gain from a 30% stake sale in One IFC compared to our and consensus’ full-year net profit forecasts of RM20 million to RM84 million.

Overall, slow billings for the construction and property development segments led to a 29.5% year-on-year (y-o-y) decline in revenue for the financial year ended Dec 31, 2019 (FY19), led by the property division. A one sen dividend per share for FY19 was below our forecast of two sen.

The discrepancy arose from MRCB’s property development projects’ slow work progress, earnings of selected property projects deferred until the sale and purchase agreement’s (SPA) completion, a retiming of a Light Rail Transit Line 3 (LRT3) contract and a higher depreciation and tax rate. The LRT3 joint venture (JV) profit — MRCB’s 50% share of the turnkey profit from the revised LRT3 project — remained thin.

MRCB’s property development and investment division’s FY19 revenue declined 46% y-o-y due to slow revenue bookings for high-rise projects pending the SPA’s completion. Excluding a RM55.8 million gain from the sale of assets, its property development’s core operating profit was RM18.8 million for FY19 or an earnings before interest and tax (Ebit) margin of 3.3% versus a core Ebit of RM31 million for FY18, excluding a RM66.8 million land sale gain (core Ebit margin: 4.7%).

For the construction division, a 10% y-o-y drop in revenue for FY19 was due to slower billings, while the construction Ebit plunged 59% y-o-y, dragged by cost provisions of RM10 million. MRCB’s outstanding order book stood at RM21 billion as at end-FY19.

The LRT3 JV profit for FY19 stood at RM600,000 compared with RM14.6 million for FY18. During a conference call, the group guided the LRT3 profit will only improve when negotiations on the revised construction cost for each work package contract are finalised with the project’s scopes fully resumed, likely in the second half of FY20.

Our FY20 and FY21 earnings per share forecasts for MRCB are cut by 11% to 13% to reflect thinner property and construction margins and higher costs. We expect its net profit to recover in FY20 on stronger billings for property development. We still feel the group’s unexciting earnings outlook, coupled with a weak visibility of new order flows, will remain a major overhang to its share price.

Weak market sentiments from the recent political upheaval, potentially resulting in a change of government in Malaysia, are likely to cap MRCB’s share price upside. Our “hold” call for MRCB is reiterated with a lower realised net asset value (RNAV)-based TP of 70 sen — an unchanged 40% discount to the RNAV. Potential upside risks are a revival in contract wins and a clarity on East Coast Rail Link tenders. A key downside risk is sustained losses. — CGS-CIMB Research, Feb 27