Unexpected losses from RAPID project drags Mitrajaya

KUCHING: Unexpected losses from their portion of the refinery and petrochemical integrated development ( RAPID) project – in terms of cost overruns and lower-than- expected construction margins from other jobs – has put a drag on the earnings of Mitrajaya Holdings Bhd ( Mitrajaya).

This came after it registered its core net profit of RM32.1 million for the first half of 2017 (1H17) which came in below expectations, accounting for 31 per cent of both Kenanga Investment Bank Bhd ( Kenanga Research) and consensus estimates.

“Core net profit for the second quarter of 2017 was down 30 per cent quarter on quarter despite revenue rising four per cent mainly due to lower construction earnings before interest and tax (EBIT) margins, stemming from losses amounting to RM6.5 million incurred from their RAPID project Package 14- 0304 worth RM186 million which was secured back in Nov 2015.

“We believe the losses were due to cost overruns from additional safety requirements imposed by the client, leading them to spend on additional machineries and labour,” it said.

To note, Mitrajaya’s core net profit in 1H17 was down 32 per cent year on year (y- o-y) also due to lower construction margins on the reasons stated above and also higher effective tax rates.

“That said, we note that property EBIT contributions increased 173 per cent on the back of higher billings from advance works at Wangsa 9 project,” it added.

Currently, Mitrajaya’s outstanding orderbook stands at circa RM1.42 billion, which Kenanga Research said provided earnings visibility for another circa one and a half to two years. Jobs secured to date amount to RM434 million, it added, which accounts for 54 per cent of Kenanga Research’s RM800 million target with a remainder of RM366 million to be achieved.

“We note that our replenishment RM800 million target is slightly more conservative against management’s target guidance of RM1 billion given the slower property market whereby Mitrajaya has a strong track record in high rise residential projects.

“Meanwhile, we note that the abrupt rise in steel prices since July 2017 could potentially compress margins further for the rest of the year. For their property arm, unbilled sales stood at RM233 million -- mostly from Wangsa 9 residency and Puchong PRIMA affordable homes -- which is expected to provide circa two-year visibility to the group.”

For the time being, its South Africa division will see unbilled sales of 45 million rand or RM14.8 million recognised progressively upon completion of the transfer of ownership in FY17 and early FY18.

“Post result, we cut our FY17-18E earnings by 31 to 18 per cent after factoring RM18 million losses for their on-going RAPID project and reduce our construction margin assumptions for other on- going projects given the abrupt rise in steel prices since July 2017,” Kenanga Research said.