Macquarie Equities Research (MQ Research) maintained an Outperform rating on Malaysian Resources Corp Bhd (MRCB) in its report released yesterday (25 Jul). MQ Research believes that the share price will be driven by sale of the Johor Bahru Eastern Dispersal Link (EDL) expected in August 2018, and that there will be minimal impact from the LRT3 cost cut and potential MRT2 cost cut. MRCB shares closed down 0.6% to RM0.775 yesterday.

Event

• MQ Research maintains an Outperform (OP) rating on MRCB following the recent changes in management and the revision of its construction orderbook. The changes in its orderbook has prompted MQ Research to revise its Target Price (TP) to RM1.00 (from RM1.25) implying a 24x multiple to FY19E earnings per share (EPS). Based on MQ Research’s Bear Case scenario, MRCB’s fair value is at RM0.88, as such at the current level, the stock is still undervalued. MQ Research believes MRCB’s share price will be driven by the sale of EDL (expected in August 2018), improved sentiment of the sector and the earnings delivery from its RM6.2bn outstanding orderbook.

Impact

• Minimal impact from potential MRT2 cost revision; EDL sale to be concluded in 3Q18. MQ Research highlighted in its recent report that it expects a cut in MRT2 (the Sungai Buloh-Serdang-Putrajaya line) cost to happen soon, with a potential alignment cut which may impact MRCB’s package (V210). MRCB’s MRT2 package is worth RM604mn and at the end of 1Q18 the construction progress stood at 20%. According to management if there is any contract cancellation, MRCB will be compensated for the costs incurred thus far, plus MRCB’s projected profit for this package – therefore the impact is minimal. Separately, MRCB is confident to conclude the sale of EDL to the government as early as August 2018 with expectations that government will compensate them the par value of the EDL bonds and the interest costs incurred throughout 2018 – which we estimate to be RM1.14bn.
• MRCB Construction listing worth another look. Once MRCB settles the landbanking debt in 4Q18, with a cleaner balance sheet, MQ Research believes the time is apt for MRCB to reignite its plans to list its construction division. Among other justifications, by listing the construction arm MRCB would be able to recognise the construction jobs from the property division as external orders. The potential RM1.1bn p.a. (RM16bn gross development cost (GDC) over 15 years) construction jobs from the property division could bring at least an additional RM20mn in earnings by listing this division, and the number will increase once new orders come in the following years. MQ Research estimates the division to bring at least RM80mn profit in FY19E and given the sector’s current price-earnings (PE) band of 10x-14x, the initial public offering (IPO) could raise between RM800mn-1.2bn.

Earnings and Target Price Revision

• Revise FY18-20 EPS estimates by +4%/-37%/-31%, respectively.

Price Catalyst

• 12-month price target: RM1.00 based on a Sum of Parts methodology.
• Catalyst: Announcement of the EDL sale to the government.

Action and Recommendation

• Maintain Outperform.

Source: Macquarie Research - 26 Jul 2018