The Malaysian Reserve, 05 August 2014 - MRCB's GDV rises significantly on Kwasa project

The Malaysian Reserve, 05 August 2014

Highlights

THE completed acquisition of the four pieces of land from Nusa Gapurna Development Sdn Bhd, as well as the recent award of the Kwasa Daman-sara Project MX-1, have boosted the group's already bulging and very strong property gross development value (GDV) to RM19.5b, placing it behind key property developers, SP Setia Bhd, Tropicana Corp Bhd, Sun-way Bhd, 1JM Land Bhd and 101 Properties Group Bhd, but ahead of UOA Development Bhd.

New E&C contracts yet to materialise. In E&C, the group has yet to announce major new contract wins since October 2013. However, pending the outcome of its tenders, we expect the group's outstanding orderbook of RMl,142m as at March 31, 2014, and internal building jobs to keep the E&C division busy until 2019.

Building a substantial property investment portfolio. The group's continued focus on niche high-rise mixed development and transport terminals should provide opportunities for further additions to its property investment portfolio, which stands at approximately RM3.4b (including RM750m for Platinum Sentral which will be sold to Quill Capita Trust (QCT) for cash and new QCT units but before the inclusion of the St Regis development).

Prospective investment assets include quality buildings to be built in PJ Sentral Lot 8 and Lot 12, Penang Sentral and Project MX-1. Rising profits as well as selected monetisation of non-core assets and potential conversion of Warrants 2013/18 are alternative sources of fundings to grow its property development and investment portfolio and to execute Project MX-1.

The completed sale of its 30% stake in DUKE has raised cash reserves by RM228m while the pending sale of Platinum Sentral should bring in another RM486m. Gross gearing for the group has declined from 2.1x to 1.93x after the settlement agreement with PKNS and the acquisition of 70% of PJ Sentral.

Has government decided not to acquire the EDL? A local newspaper reported that the Malaysian government has decided not to acquire the Eastern Dispersal Link (EDL) after a two-year study.

Malaysian Resources Corp Bhd (MRCB) has yet to make an announcement on this matter. It is also unclear at this stage if the toll hike for the Johor from Aug 1 will accrue to MRCB or if the compensation of almost RM12m/month will continue to be paid by the government.

Raising RNAV estimate from RM2.26 to RM2.54. We are raising our RNAV estimate for MRCB from RM2.26 to RM2.54 after incorporating: 1) A more comprehensive list of property investment assets, including the recently completed Nu Sentral Retail Mall and Nu Towers;

2) A 70% stake in Project MX-1, lower pretax margin of 20% (previously 25%) for KL Sentral projects and 15% (previously 22%) for other projects and DCF of property development earnings streams at WACC of 8%; and

3) A lower E&C billing of RM700m pa and pretax margin of 5%.

Reaffirm 'Buy' call; maintain forecasts. We expect property launches between now and 2017 to underpin group profits until 2019-20. We maintain our 2014-16 forecasts (EPS adjusted for enlarged issued capital of 1,760.1m shares), 'Buy' call and TP of RM2.26, which now implies an 11% discount to our revised RNAV of RM2.54.

Key Risks

Key downside risks include: i) delays in contract awards; ii) sharp spike in construction costs; iii) further government tightening measures sharply cutting property demand; iv) unfair pricing for its concession and property investment assets; and v) future acquisitions through the issue of new shares diluting EPS and valuation.

Also, reclassification from the construction to the property sector may cap upside due to available choices of key property stocks and higher discount to RNAV..