A mutual termination of the 100%-owned Eastern Dispersal Link (EDL) concession appears under way
KUALA LUMPUR: CIMB Equities Research is retaining its reduce call on Malaysian Resources Coorp Bhd (MRCB) with a lower target price of 54 sen from the previous 90 sen after the rail projects have been cancelled by the new Pakatan Harapan government.
The research house explained on Thursday that it had widen is realised net asset value (RNAV) discount from 30% to 50%.
It said the revision was to reflect the deteriorating investor sentiment on major rail contractors and project delivery partner (PDP) companies like MRCB, whose future rail outlook has been impacted by the cancellation of the HSR and MRT 3 (Circle Line) projects.
"Upside risks to our call are a revival of the deal to divest the Eastern Dispersal Link (EDL) and stronger quarterly earnings," it said.
To recap, it said MRCB’s 1Q18 core net profit climbed 208% on-year to RM21.5mil, with the engineering segment becoming a major earnings contributor, at 66% of group EBIT (1Q17: 4%).
“Although at only 16% of our full-year earnings forecast, we deem the core net profit to be in line with our expectation.
“We expect construction earnings to improve significantly in the coming quarters, as 60% of its outstanding RM4.9bil external order book is made up of higher-margin infra works.
CIMB Research said the construction segment’s 1Q18 EBIT surged by 7.5 times, thanks to: i) cost-savings initiatives; ii) infra projects dominating the order book and iii) LRT 3 PDP fee rising from RM1.3mil in 1Q17 to RM8.9mil in 1Q18.
This more than made up for the 43% on-year decline in the property development division’s 1Q18 EBIT, as MRCB had handed over the Easton Burwood residential development.
“Although we did not impute the potential HSR PDP earnings, earlier estimated to bump up FY19-20F EPS by 42-56%, the cancellation of the HSR project by the newly-elected government is a big opportunity loss for MRCB, in our view.
“The PDP contract which it had secured could have solidified its plans to be the main developer of the HSR terminus in Bandar Malaysia. The estimated RM20bil-RM25bil PDP contract awarded to the MRCB-Gamuda JV (50:50) pre-GE14 has now become invalid,” it said.
CIMB Research maintained its FY18-20F EPS and RM500mil new order book assumption per annum but highlight that potential downside to this assumption could arise should the job outlook for the overall sector become subdued in 2H18.
“Longer-term earnings (beyond our forecast period) should be supported by the PDP contracts from Kwasa Damansara and Bukit Jalil (combined value of over RM20bn), in addition to the PDP earnings from the ongoing RM9bil LRT 3 contract,” it said.
CIMB Research also said under PH’s manifesto, it targets to review all highway concession agreements and if need be, to acquire all highways via the expropriation clause.
MRCB revealed that it has entered into discussions with the new government on the disposal of EDL. It believes an expropriation method is unlikely and would pursue a sale just to cover its cost.
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