MRCB - EDL poser

-  We reaffirm our HOLD rating on Malaysian Resources Corporation (MRCB), with our fair value of RM2.30/share currently placed under review.

-  MRCB’s 2QFY12 net profit came in at RM5mil (-77% QoQ), bringing its 1HFY12 earnings to RM27mil – a massive 33% decline YoY – despite revenue growing by 47%. This accounts for only 33%-34% of our, and consensus’ estimates.

-  The main reason for this underperformance was mostly due to  losses at Eastern Dispersal Link (EDL) whereby MRCB is required to service the finance costs – to the tune of RM7mil/month – despite no toll charges for the highway. 

-  However, we understand that MRCB has been negotiating with the government for some form of compensation beginning May 2012 to cushion the costs of operating the expressway. The negotiations also include the possibility government agreeing in-principle to take over the ownership of the highway. 

-  We do not foresee this issue to be resolved in the immediate term, given the sensitivities in view of the general elections just around the corner.

-  On the flipside, there will be about a six months’ delay to the LRT extension works, given that Prasarana is facing some hurdles in land acquisition. 

-  MRCB is going ahead with the launch of high-rise residential units in Kia Peng this year. The development would have a GDV of RM300mil or at an average price of RM1,200psf. MRCB is looking at launching its Setapak development within the next two years. Meanwhile, the Brickfields development would likely begin in 4QFY13, after the government quarters are moved to the new site.

-  Going forward, earnings will be driven by property unbilled sales of RM1.3bil (2.7x 2011’s property revenue) and an outstanding construction order book of RM2bil. While earnings did not meet our expectations for 1HFY2012, we expect a strong property income to drive the rebound in earnings. Additionally, Q1 and Q2 have historically been weak. Hence, we are keeping our estimates at this juncture. 

-  MRCB is currently trading at a steep 36% discount to its estimated SOP value. While valuation is demanding at 27x for FY13F earnings, newsflow on the award of MRT packages and the possible share swap with Gapurna would support the share price. 

Source: AmeSecurities