News In
an announcement made by Fajarbaru Builder Group Bhd (FGB, UP, TP: RM 0.51), MRCB’s wholly-owned subsidiary,
MESB had terminated the sub-contract works of the Ampang Line Extension Work to
FGB. At the same time, Prasarana had taken over the liability and cost of the
project and awarded the project to FGB. The contract value is worth RM289m. It
was mutually agreed between Prasarana and MESB that the project value would be
omitted from the earlier main contract award to MRCB of RM1.3b.
Comments This news is a negative development for MRCB.
This will shrink its existing order book by RM289m. Its current order book
stands at c.RM1.4b. To recap, MRCB had secured the contract from Prasarana for
the extension of the Ampang Line LRT project (Package B) worth RM1.3b. MRCB
subsequently subcontracted the construction of the depot (under the same
package) to FGB worth RM289m.
We understand that
the margin for the project is minimal at c.3% to 4%. The site progress is
behind schedule due to delays in site possession. Based on management guidance,
thus far, the contribution from the project in FY12 was negligible. This is in
line with our assumption as we had already rolled over the recognition to
FY2013.
We think that there
could be more unfavourable news that could come out in the near term for MRCB.
It is likely that MRCB will have to make a c.RM44m provision in its upcoming
4Q12 results due to the damages claim by Juranas Sdn Bhd in December 2012.
Outlook In the near term, there will be less
excitement or even possibly more negative surprises to the construction sector
due to the election risk.
However, on a longer
term outlook, the upside for MRCB’s earnings should emerge post the elections, possibly
from the development of the RRI land and land banks injection from its
potential new shareholders.
Forecast We have reduced our FY13E by 11% as we
stripped out the RM289m contract value from its existing order book.
Rating Maintain OUTPERFORM
We are maintaining
our OUTPERFORM recommendation as we
expect MRCB to be the likely beneficiary of post-election events.
Valuation We
have reduced our Target Price from RM2.22 to RM2.16 based on a SOP valuation.
Risks Delays in securing more land banks and cost
overruns at its ongoing projects due to construction delays.
Source: Kenanga
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