Malaysian Resources Corp - EDL compensation aided earnings rebound in 3Q Hold

- We reaffirm our HOLD recommendation on Malaysian Resources Corporation (MRCB), with our fair value lowered to RM1.65/share (from RM2.30/share previously), assigning a higher 25% discount to its revised sum-ofparts value of RM2.20/share. The lower SOP value is to reflect continued uncertainty over the Eastern Dispersal Link saga and we have also rolled forward our valuation to FY13F. 

- MRCB reported a strong rebound in earnings in 3QFY12 at RM36mil versus RM5mil in the preceding quarter, mainly due to government compensation on EDL amounting to RM43mil and impairment write-back on EDL. This was a pleasant surprise as the timing for this compensation was uncertain despite the commitment by the government. 

- From what we gather, this compensation would be continued until the acquisition of the highway takes place. However, we believe the timing of the acquisition remains uncertain due the sensitivity of the issue especially with the general election around the corner. 

- This means MRCB’s 9MFY12 earnings (-0.5% YoY) came in largely in-line with our estimate, although this exceeded consensus, covering 78% and 89% of FY12F forecasts, respectively.

- Property development business was the key driver to its earnings with Lot G, Q Sentral and The Sentral Residences being the main contributors. On the flipside, its engineering and construction division reported operating losses due to provisions amounting to RM13mil to some its completed projects. 

- We are keeping our estimates for FY12F at this juncture despite having seen its earnings coming slightly above (+4%) our numbers. We are slightly concerned that there could be more earnings surprises in the final quarter although the management does not expect any more provisions for E&C division in the final quarter.

- Going forward, apart from KL Sentral – albeit at the tail-end of its development – the group’s most immediate development in the pipeline would be its Setapak and possibly Kia Peng projects. However, the group has not set any definite timeline for the launches.   

- From a valuation standpoint, MRCB appears attractive, currently trading at FY13F PE of 26x, a 13% discount to its 3-year historical average PE of 30x. However, we believe the stock would continue to trade within range given the continued uncertainty over the EDL saga. While compensation is secured until end of the year, we are not sure if this will be continued in 2013. Furthermore, the group lacks clear re-rating catalysts at this point.

Source: AmeSecurities