RHB Research retains Buy on MRCB, target price RM1.60

Malaysian Resources Corporation Bhd and George Kent (M) Bhd are the project delivery partner (PDP) for the light rail transit three, which is estimated to cost RM9bil.

KUALA LUMPUR: RHB Research Institute is maintaining a Buy on Malaysian Resources Corporation Bhd (MRCB) with a target price of RM1.60.

It said on Wednesday MRCB’s earnings improvement and financial position should be more visible in FY17. 

“This is underpinned by the potential disposal of the Eastern Dispersal Link (EDL), as well as other commercial office buildings. 

“Meanwhile, the Light Rail Transit Line 3 (LRT3) project deliver partner (PDP fees as well as the stable dividend income from MQREIT will provide a solid earnings base. Earnings from key operations are driven by RM1.3bil unbilled sales and RM2.13bil construction orderbook,” it said.

The research house said MRCB’s plan to lower its net gearing to 0.45 times by end 2017 (2Q16: 1.09 times) is on track. 

Although the intention to sell the EDL is widely known, RHB Research believes the market is sceptical on the timing and management’s execution. 

“Based on our recent conversation with management, we understand that negotiations with interested parties are ongoing, and it hopes to ink an agreement by end 2016 or early 2017. 

“As the RM1.18bil debt associated with the EDL has been a drag on the company’s balance sheet and P&L, given an interest rate of 7% for the bond, its removal from MRCB’s books would significantly strengthen its financial position,” it said.

The research house said MRCB’s net gearing should go down to around 0.3 times after the disposal of Menara Shell is completed. 

In the pipeline, Menara Celcom would be up for sale in 2H17. The office building is worth about RM640mil and the construction will be completed early next year.

On the EDL, it said the company was EBITDA positive but in the red at net level. 

“Without it in the books, earnings ought to improve quickly. Assuming MRCB is to sell the EDL at cost, its P&L would see immediate amortisation savings of RM40m per annum. Meanwhile, the disposals of Menara Shell and Menara Celcom are estimated to yield a gain of RM50mil to RM55mil in 4Q16/1Q17 and RM80mil to RM100mil in 2H17 respectively.

“The total LRT3 PDP fees of RM270mil are to be spread over the next 4.5 years. The REIT should also form a strong earnings base for MRCB in the coming years. The LRT3 PDP fees have started kicking in since 2Q16, although the amount is small thus far. 

“As the contribution follows an ‘S’ curve, we expect the contribution to be about RM15mil to RM20mil in FY17. In addition, the dividend stream that MRCB would receive from MQREIT (Buy, TP: RM1.32) should grow further to above RM20mil after the sale of Menara Shell and placement exercises are completed,” it  said.