The current buzz surrounding Malaysian elections as well as the ongoing awards of infra contracts has led to the valuation of the Malaysian construction sector to be at a 5-year high. Macquarie Equities Research (MQ Research) is thus reiterating their outperform call on MRCB with a target price of RM2.00, and believes that this is the best time for MRCB to list its construction division.

Event

• MQ Research reiterates their outperform rating on MRCB and retains it as their top pick in the Malaysian property sector as they revise their target price (TP) upwards from RM1.85 to RM2.00, on the back of forecast adjustments in the property and construction divisions. MRCB is also one of MQ Research’s top top government-linked company reform picks.

• Listed as a property company on Bursa Malaysia, MQ Research believes MRCB could further enhance the value of the group by listing its construction division in the medium term (12 to 18 months). MRCB’s construction division is currently sitting on an outstanding orderbook of RM5.4bn and MQ Research forecast the division to replenish its orderbook by RM1bn/FY in FY17-19E. Given that the loss-making legacy projects from the previous management already realized in FY16, MQ Research believes margin expansion in MRCB’s construction division is on the cards with an estimated profit after tax CAGR of 66% in FY17-19E. By separately listing the construction division, MQ Research thinks that the construction division could be accorded with higher valuation multiples, as seen in the listing of Sunway Construction. Since IPO, SunCon’s market cap grew by 50% vs its parent – Sunway Berhad at 6%, over the same period, strong proof of value creation. With proper execution, the precedence set by SunCon could be a blue sky scenario for an MRCB Construction IPO.

 
Impact

• Timing – strike while the iron is hot. MQ Research believes that the election factor coupled with the ongoing award of infra contracts are tailwinds for the Malaysian construction sector which, thus far, have pushed the forward P/E ratio multiple of the sector near its five-year high at 16x (five-year average: 13x). As such, MQ Research thinks that the timing for a stand-alone listed entity for MRCB Construction appears ideal.

• Construction sector gives a better multiple compared to property. Historically, the market has given higher multiples to the construction sector as opposed to the property. Currently, the fwd-PER of the KLCON Index trades at 16x vs KLPRP Index at 13x (five-year avg: 12x).

• Granted orderbook support from MRCB Land’s development projects. MRCB’s landbank portfolio has an underlying gross development value (GDV) of c.RM44bn with its key development projects – Kwasa Sentral, Cyberjaya City Centre and KL Sports City carrying a combined GDV of c.RM29bn. If MQ Research assumes 25% of the GDV is construction cost, MRCB Construction would be able to book at least RM7.2bn worth of construction jobs in its orderbook.

 
Earnings and Target Price Revision

• MQ Research adjusts their forecasts and revise their TP by 8.1% from RM1.85 to RM2.00. They revise their EPS estimates for FY17-19E by +9.4%/+3.8%/-11.9%.

 
Price Catalyst

• 12-month price target: RM2.00 based on a Sum of Parts methodology.
• Catalyst: The finalisation of EDL divestment, which should significantly decrease MRCB’s finance cost, and hence increase its profitability.

 
Action and Recommendation

• Maintain Outperform.

Source: Macquarie Research - 30 Mar 2017