KUALA LUMPUR (July 16): RHB Research has maintained its "buy" rating for industrialised building system (IBS) precast manufacturer MGB Bhd at 47 sen, with a higher sum-of-parts-based target price (TP) of 58 sen from 56 sen, a 23% upside.

In a note today, RHB analysts Eddy Do Wey Qing and Muhammad Danial Abd Razak said they lifted MGB’s financial year ending Dec 31, 2020 forecast (FY20F) to FY22F earnings by about 3% to 5% after raising their replenishment assumption for FY20, although no changes were made to other inputs.

The analysts explained this came after MGB clinched its second FY20 contract win from LBS Bina Group Bhd with a RM215 million contract sum. The contract includes piling and building works for a proposed gated and guarded housing development, which comprises 901 and 250 units of double-storey terrace houses and double-storey town houses respectively in Bandar Alam Perdana.

The project is set to commence in October, and is slated for completion in April 2023, totalling 30 months.

“We are positive on this contract win as the year-to-date (YTD) contracts awarded have exceeded our FY20 contract win assumption of RM300 million — this is within management’s RM300 million to RM500 million guidance.

“Following the announcement, we raise our FY20 contract win assumption to RM500 million and expect further wins this year, with works to commence in FY21” they added.

However, based on current numbers, their calculations suggest revenue for MGB’s construction division for the second quarter ended June 30, 2020 (2QFY20) could come in at RM50 million to RM60 million, a possible 65% to 70% decline year-on-year (y-o-y), given the impact of the movement control order (MCO).

On a positive note, the analysts said the current outstanding construction order book provides more than two years of earnings visibility, vis-à-vis average annual construction billings of RM700 million to RM750 million.

The research house’s new TP implies 11.7 times FY21F price-earnings ratio (PER) with a 13% discount on the 13.5 times sector average.

“We deem this fair, given a strong FY20F-22F earnings compound annual growth rate (CAGR) of about 70% and anticipation of more participation in affordable housing projects.

“We continue to like MGB as it should benefit from economies of scale for its IBS plant from outstanding construction orders, as well as its Idaman project.”

RHB noted that key downside risks include a sharp increase in input cost (cement), delayed launches and a failure to meet conditions precedent, which are entailed in MGB’s proposed joint-venture agreement for the Idaman project.

At 9.20am, MGB had gained three sen or 6.45% to 50 sen, with a market capitalisation of RM233.27 million. The stock saw some 447,600 shares traded.