MRCB - 3Q12 results above expectations

Period   3Q12/9M12

Actual vs. Expectations    The 3Q12 results came in above ours and the consensus’ expectations. The 9M12 net profit of RM63m made up 147% and 90% of ours and the consensus’ full-year FY12 forecasts respectively. The key highlight of the results was the recognition of EDL’s compensation from the Government, which amounted to RM55m for the period of May to Sept 2012 (RM11mx 5 months).

Dividends     No dividend was declared during the period.

Key Result Highlights    The 9M12 net profit of RM63m grew by 23% on the back of a 31% increase in revenue. The revenue and EBIT of its property division soared by 60% and 83% respectively. The strong property earnings were attributable to positive property development in KL Sentral as well as the rental income contribution from Platinum Sentral. In addition, its environmental division made a turnaround from a RM2.4m EBIT loss to a RM45m profit.

QoQ, the net profit grew seven-fold to RM36m due to the recognition of the EDL compensation of RM55m. Without the compensation, 3Q12 results would have been in a net loss of RM20m. The construction revenue dropped by 33% due to the delays in LRT projects and the lack of new contract replenishments. At the EBIT level, the construction division recorded a loss of RM16m as compared to the RM12m profit in 2Q12.

YoY, the net profit grew significantly due to the EDL compensation. In this quarter we also saw the backdated compensation for May and June 2012 recorded as an “other operating incomes." If we strip out these two months compensation (RM22m), the 3Q12 core net profit grew by 29% YoY. The property division remained as an outperformer with its revenue and EBIT increased by 31% and 58% respectively.

Outlook    The “takeover” of EDL by the government is imminent and we believe that the negotiation is now at the tail- end especially on the pricing. However, we do not discount that the negotiation could be prolonged until after the general election. We value EDL at RM1.4b, which translates into RM0.14 per share for MRCB.

 Forecasts     We are now imputing in the EDL compensation in our forecast and have netted it off against the finance cost expenses hence, raising our FY12-13E by 52% and 11%, respectively. We have also factored in RM1.0b worth of new contracts in our FY13E forecast.

Rating     MAINTAIN OUTPERFORM

We are maintaining our OUTPERFORM recommendation. The solution on EDL issue will spark interest in MRCB together with its potential to secure new construction contracts in the near term.

Valuation     We have revised our target price higher by 7% to RM2.22 from RM2.07 based on a RNAV valuation.

Risks     Prolonged negotiation on the EDL takeover price.

Source: Kenanga