MRCB - BUY - 21 May 2008

MRCB - 1Q08 results way below expectations (Results Note)



Price: RM1.52

Target Price: RM2.26

Recommendation: BUY



· 1Q08 net profit of RM13.9m was below expectations at 12.2% and 15.1% of our full year forecast and consensus of RM113.6m and RM91.8 respectively. The weak 1Q08 results is not representative of full year's results given lumpy profit recognition on land sale and typically weaker 1Q results for construction given the shorter operating months.

· YOY 1Q08 net profit was 14% higher, largely on investment income. Other operating income of RM27.3m was 3.5x higher YOY which included redemption of non cumulative redeemable preference shares (NCRPS) of associate and subsidiary.

· QoQ, 1Q08 net profit was a sharp turn around from 4Q07 net loss of RM5.5m. 4Q08 net loss was largely a result of recognition of significant deferred tax expense of RM18.1m in finalising its accounts giving an effective tax rate of 147%.

· Lowering forecast for FY08E and FY09E by 16% and 14% to RM95.3m and RM147.5m respectively. Despite the lock in construction contracts and property development sales, we have lowered our forecast anticipating raw material cost increases and delays in execution of the projects. Nevertheless, we are still positive on MRCB given its focus on developing the highly sought after KL Sentral In addition, East Malaysia electrification is expected to be fast track given the focus on SCORE.

· Is Penang Monorail off? MRCB has just added the RM1.1b Penang Monorail project to its list of projects prior to the general elections in March 2008. While there are many rumours and statements made on the project being delayed and reviewed, the project remains a Federal project and is sorely needed to alleviate the traffic congestion in Penang. We believe the project will be carried out and a review of costing is necessary given the rising cost of building materials. MRCB's order book with the Penang Monorail project is about RM3.4b and should last them the next 2 ½ years.

· Maintain BUY with target price of RM2.26 The stock is trading at 12x and 8x FY08E and FY09E PER respectively. Rerating catalysts would arise from securing large infrastructure projects and more immediately confirmation of Penang Monorail project commencement.







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