MRT2 contract seen contributing RM6.8m to MRCB’s bottom line per annum

Malaysian Resources Corp Bhd (May 13, RM1.22)

Maintain market perform with a target price (TP) of RM1.39: Last Thursday, Mass Rapid Transit Corp Sdn Bhd (MRT Corp) announced that it had awarded two viaduct packages, V210 and V203, with Malaysian Resources Corp Bhd (MRCB) bagging V210 worth RM648 million. V210 consists of a 2.6km viaduct guideway and other associated works from Persiaran Apec in Cyberjaya to Putrajaya Sentral, part of the four work package contracts awarded for the construction of the mass rapid transit (MRT) Sungai Buloh-Serdang-Putrajaya line (MRT2), with a combined value of RM4.2 billion. We gather that MRCB has not received any official letter from MRT Corp, which explains the absence of an announcement to Bursa Malaysia on the job award.

We expect a formal announcement once MRCB obtains the formal documents from MRT Corp.

We are neutral on this news as the project value of RM648 million is within our construction order book replenishment assumption of RM1 billion. Year to date, MRCB has bagged RM704.8 million worth of construction works, representing 70.5% of our financial year 2016 estimate (FY16E) construction order book replenishment with a remaining RM295.2 million balance to be filled. On April 5, MRCB’s subsidiary MRCB Builders Sdn Bhd signed a RM56.8 million contract with Jupiter Lagoon Sdn Bhd to construct a cold storage processing and distribution centre for GCH Retail (M) Sdn Bhd, which operates the Giant chain in Malaysia.

Assuming a pre-tax margin of 7%, the MRT2 contract is expected to contribute about RM6.8 million to MRCB’s bottom line per annum, which is already factored into our FY16E to FY17E earnings of RM38.4 million to RM65.3 million. MRCB has already bagged 70.5% of our construction replenishment assumption for FY16, and we may look to upgrade our construction order book assumption if it continues to secure jobs at this pace.

Currently, MRCB’s remaining external construction order book is at about RM3.2 billion, coupled with about RM1.6 billion unbilled property sales providing the group with at least two years of earnings visibility. We make no changes to our FY16E to FY17E earnings estimates of RM38.4 million to RM65.3 million. We reiterate our “market perform” call and TP of RM1.39 based on FY16E net tangible assets (NTA) per share of RM1.10 and a forward price-NTA (P/NTA) ratio of 1.26 times, which is -1 standard deviation to the average six-year historical mean. We apply a below-average forward P/NTA ratio due to weakening sentiment on the stock arising from a softer property segment, dilution of existing shareholdings from the placement and RAM Rating Services Bhd’s downgrade of MRCB Southern Link Bhd’s junior sukuk, while positives arising from the construction segment are mostly within expectations. Due to its compelling turnaround plans, we maintain our valuations, although earnings may be weak in the near term.

Downside risks to our call include weaker-than-expected property sales, lower-than-expected sales and administrative cost, negative real estate policies and a tighter lending environment. — Kenanga Research, May 13

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