Monday 12 March 2012

MRCB - OUTPERFORM - 12 March 2012


The Prime Minister, Dato’ Seri  Najib has announced that the government will review the toll collections for Eastern Dispersal Highway (EDL) and it is expected  to come up with a solution in 2 weeks’ time. It was also reported that the government is currently looking at technical issues with regards to the EDL toll collection with the possible abolishment of toll collection. The toll charge for Class 1 (Cars) had previously been set at RM6.20 and tolling to start on 1st July 2012 until 2040 as stipulated in the Concession Agreement (CA). We are not sure on the outcome on the government’s review decision above at this juncture and a total abolishment or lower toll rates are some of the possible solutions, similar to the decision made for the Grand Saga highway recently. Nonetheless, we note that EDL’s CA will somewhat cushion the impact of any toll rate revision via its toll rate mechanism. The mechanism seems to protect both the government and the concessionaire in (1) determining toll rate hikes and (2) toll collection benchmarks via traffic growth. We are maintaining our OURPERFORM recommendation on MRCB with a lower Target Price of RM2.71 (previously RM3.14) based on its RNAV. We have lowered our FY12 earnings due to the bleak outlook in its property and construction earnings in FY12 following some delays in its current projects.

Emergence of political risks.  We see this news as the emergence of political risk for MRCB and construction sector, which relates to the highly expected General Election (GE) due in this year. Although the government’s decision has yet to come, the market we reckon will perceive this news as negative to MRCB. We think that the government is likely to reduce or to abolish the toll collection due possibly to the GE factor. 

Neutral impact?  The toll rate compensation and revision for EDL is calculated differently as compared to other  toll concessions via its toll rate mechanism to determine the toll rate hike, i.e. the Agreed Toll Rate (ATR). In short, if the actual toll collection is higher than the budgeted toll collection, EDL’s next toll rate hike would be capped at the actual toll collection rates and vice versa. EDL is entitled to increase its toll rate at the quantum of 10% for every 3 years. The CA provides a clause for compensation if the government delays or announces lower toll rates as compared to the ATR. We think that the impact will be NEUTRAL for MRCB should the government abolish or reduce tolling at EDL.  

Lowering down property & construction earnings.  We have lowered our FY12 earnings by 43% as the management has guided for an unexciting reporting period for MRCB in FY12 due to delays in its property and construction projects.

Maintain OUTPERFORM with a lower Target Price at RM2.71 based on RNAV.  EDL is valued at RM0.14sen in our RNAV based on DCF valuation with WACC at 8%.

Source: Kenanga

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