MRCB - Favourites for new rail job? HOLD

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

- It has been reported in the media that a JVCo comprising MRCB and DMIA are the frontrunners for a rail job – worth RM3bil – for freight trains to ease the congestion in Kuala Lumpur’s central hub and could clinch the job early next year.

- The JVCo has proposed to build a railway line for freight trains, linking Serendah to Port Klang to ease the bottleneck at KL Sentral area. 

- This plan is not something new as it is already part of Suruhanjaya Pengangkutan Awam Darat’s (SPAD) master plan. 

- Recall that Keretapi Tanah Melayu Bhd (KTMB) was directed by the government to carry out a preliminary engineering and route alignment study for the planned Serendah-Port Klang-Seremban bypass line in September 2008, albeit there has been little headway since then. 

- Both parties certainly have experience in rail-related jobs, whereby MRCB was the key player in the KL Sentral project and is currently involved in the construction of both the Ampang and Kelana Jaya LRT extension works. 

- Meanwhile, DMIA was involved in the construction of the Central Link KLIA Expressway and the Rail Link to West Port. Nonetheless, competition may be intense given that there are other reputable players such as IJM, Loh & Loh and Gamuda. 

- From a valuation standpoint, MRCB is currently trading at a steep discount of 39% to its estimated SOP value and at a multiple of 27x to its FY13F earnings. We believe the stock would continue to trade sideways given the continued uncertainty on the Eastern Dispersal Link (EDL) issue.

- While the government has been reported to have committed to acquire the expressway, the lingering concerns would be on the timing of the acquisition, especially with General Election just around the corner and whether the preliminary compensation – to cover the EDL’s operating expenses – would be forthcoming.   

Source: AmeSecurities