MRCB's full control of LRT3 JV to improve profitability

KUALA LUMPUR: Malaysian Resources Corp Bhd's acquisition of George Kent Bhd's entire 50% stake in their Light Rail Transit 3 (LRT3) joint venture is a bargain purchase and will improve contract profitability, says Kenanga Research.

In a note, the research house said the RM53mil stake purchase is a bargain given that MRCB-GK Sdn Bhd still has future profits yet to be recognised, which would enhance its existing book value.

"Based on our calculations, we believe the LRT3 project (which is at 58% progress as of 1HFY21) could contribute another RM95.5m in profits to MRCB-GK Sdn Bhd and increase its total book value to RM210m by 2024 upon project completion.

"Therefore, against the purchase price of RM53m, there is potential value accretion of c.RM52m for the 50% stake in the next three years," it said.

Accordingly, MRCB would be paying about 0.5 times price-book value for the stake.

Kenanga also expects JV's profitability to improve through the reduction of overheads and staff costs as the previous duplication of resources at the JV level can now be eliminated and resources can be shared with its parent company.

While MRCB-GK has no current borrowings, future finance costs could also be reduced as rates obtainable by MRCB is about 4.5% versus about 7% at the JV level previously.

Post-acquisition, MRCB's effective outstanding order-book will increase RM2.4bil to RM6.8bil from RM4.4bil previously, said Kenanga.

The research house, which is overall positive on the acquisition, raised FY22 earnings projections by 61% to RM49mil after consolidating the 50% stake.

It maintained "market perform" on MRCB with a higher target price of 40.5 sen from 39.5 sen previously after imputing the value accretion of about RM52mil derived from the stake purchase.
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Kenanga Research , MRCB , George Kent , LRT3


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