Continuation of LRT3 seen as positive for prospects of MRCB- George Kent JV

Malaysian Resources Corp Bhd (Oct 18, 77.5 sen) 

Maintain buy with a lower target price (TP) of RM1.07: We take note of the approval granted by the government to continue with the light rail transit Line 3 (LRT3) project according to the announcement made on Bursa Malaysia on Wednesday. As outlined in July this year, the project will proceed until completion at a cost of RM16.6 billion. This was following the cost-reduction exercise as instructed by the new federal administration.

What comes with the revised cost? In totality, the new cost coverage is expected to include all project costs, including but not limited to work package contracts, land acquisition, project management, consultancy fees, operational and overhead costs as well as interests during construction. Although the announcement did not reveal the cost-cutting details, we refer to the finance ministry’s earlier statements as a benchmark for the current costs. Accordingly, some of the notable measures taken to adjust cost include reducing the order of 42 sets of six-car trains to 22 sets of three-car trains, reducing the construction size of the LRT train depot, streamlining the size and design of the LRT stations based on existing LRT line standards, and extending the timeline to complete the LRT3 project from 2020 to 2024.

All things considered, we opine the continuation of LRT3 emits positive tone on the prospects of the Malaysian Resources Corp Bhd (MRCB) and George Kent (Malaysia) Bhd joint-venture (JV) company. While the project’s costs have been significantly reduced, we are comforted that the cost-savings approach prioritised by the new government did not result in the loss of earnings opportunity for the JV company. However, the cost structure has been materially altered. Taking this into consideration along with the new fixed price model, we estimate that net profit margin to be adjusted lower. 

We believe that adjustment to our earnings forecast is reasonable. This is taking into consideration the final earnings contribution and the extension of the project deadline from 2020 to 2024. To reflect changes, we are adjusting our forecasts lower by 11% and 8% for financial year 2018 (FY18) and FY19 respectively.

Accordingly, we arrived at a TP of RM1.07 per share driven by our sum-of-parts valuation. — MIDF Research, Oct 18 

This article first appeared in The Edge Financial Daily, on Oct 19, 2018.

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