MRCB to see more potential contract wins in 2016

Malaysian Resources Corp Bhd  (Oct 29, RM1.26)

Maintain add with a higher target price (TP) of RM1.40: Malaysian Resources Corp Bhd (MRCB) announced that it secured a RM1.6 billion land swap contract to refurbish the National Sports Complex (NSC) in Bukit Jalil in Kuala Lumpur, thus confirming earlier news of this potential win. 

Construction will be internally funded while the land swap structure translates into 93 acres (37.6ha) of new land bank close to the NSC. It will be developed into an integrated development with a gross development value (GDV) of RM14.6 billion over 16 years from 2018. The location is along a potential station for the new mass rapid transit (MRT) Line 2.

MRCB also entered into a RM270 million (70%) joint-venture (JV) agreement to acquire 53.3 acres of land to be transformed into a mixed development with a potential GDV of RM5.3 billion (which will take five to seven years to develop). This deal has an upside as it will give the JV company the first right of refusal to more than double the land bank to over 100 acres. Cyberjaya City Centre (CCC) is potentially prime urban land located next to Putrajaya Sentral. A station for the new MRT 2 is slated to be built within the CCC.

The group secured a project management, and an engineering, procurement, construction and commissioning contract for the development of 29.8 acres of land within the Kwasa Damansara township in Sungei Buloh, Selangor. This is largely a construction contract that substantially increases its order book by more than four times to RM3.9 billion, although execution is over a 12-year period from 2016. This job requires minimal funding by MRCB as the bulk of the cost will be borne by the project owner.

Construction earnings visibility significantly improves with the new order book, although we estimate that profit from the Kwasa job in the initial years will be minimal. We retain our earnings per share forecasts as we estimate that any upside to core earnings could be mitigated by a rise in interest costs, while monetisation of the new land bank should flow through beyond our forecast period.  We estimate net gearing could rise from 1.2 times to 1.8 times from the new deals, with downside potential via the group’s ongoing rationalisation.

MRCB’s order book growth story remains intact with more potential contract wins in 2016. Our TP price rises as we roll it over to end-2016, still pegged to a 30% revised net asset value discount. These wins are rerating catalysts, with potentially more construction-driven catalysts ahead. More restructuring and asset divestment moves are likely catalysts too. — CIMB Research, Oct 29

This article first appeared in The Edge Financial Daily, on Oct 30, 2015. Subscribe to The Edge Financial Daily here.