Mitrajaya 1QFY17 broadly within expectations

Downgrade to market perform with an unchanged target price (TP) of RM1.49: Mitrajaya Holdings Bhd first financial quarter ended March 31, 2017 is broadly inline. We deem 1QFY17 core net profit (CNP) of RM18.9 million to be broadly within our (19%) and consensus expectations (18%) as we note that the first quarter is typically a seasonally slower quarter for Mitrajaya and we expect construction billings to pick up in the remaining part of the year.

No dividends have been declared as expected. We derive our CNP after stripping off RM9.9 million gains on disposal of its Johor land.

The 1QFY17 CNP of RM18.9 million increased marginally by +2% year-on-year on the back of increased construction revenue on higher billings (+49%), but with slightly weaker earnings before interest and taxes (Ebit) margins (-one percentage point [ppt]).

The 1QFY17 CNP was down 25% quarter-on-quarter (q-o-q) despite the increased revenue contribution from its construction segment (+9%) due to weaker Ebit margins (-6ppts) which we believe were due to higher recognition of lower margins projects secured in financial year 2016 (FY16).

Balance sheet-wise, we highlighted that Mitrajaya’s net gearing has grown to high levels of 0.38 times (versus 1QFY16 net gearing of 0.26 times).

Currently, Mitrajaya’s outstanding order book stands at about RM1.73 billion, providing earnings visibility for another about one-and-half years to two years.

Meanwhile, jobs secured year to date stood at RM434 million, which accounts for 54% of our RM800 million target with a remainder RM366 million to be achieved.

We note that our replenishment RM800 million is slightly more conservative against management’s target guidance of RM1 billion.

For its property arm, unbilled sales stood at RM204 million (mostly from Wangsa 9 Residency) and expected to provide about two years visibility to the group.

Meanwhile, its South Africa division will see unbilled sales of Rand 24 million (RM7.3 million) recognised progressively upon completion of the transfer of ownership in (FY17).

There are no changes to our FY17 to FY18E (estimate) earnings of RM102 million and RM99 million, respectively.

Post results, we maintain Mitrajaya’s sum-of-parts (SoP) derived TP of RM1.49 after rolling forward valuation base year for its construction and property segmental earnings.

Note that we had also upgraded our property SoP valuations to seven times (from five times) in line with the recent rerate of small- and mid-cap property counters which are currently trading at an average 7.1 times FY18E price-earnings ratio.

Given that Mitrajaya’s share price has caught up with our valuations and the risk-reward ratio is no longer as compelling with no new catalyst ahead, we downgrade Mitrajaya’s rating to “market perform” (from “outperform”).

The risks to our call include lower-than-expected margins, delay in construction works, lower-than-expected order book replenishments and lower-than-expected property sales. — Kenanga Research, May 29

This article first appeared in The Edge Financial Daily, on May 30, 2017.

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