• Still BUY, new MYR0.74 TP (SOP) from MYR0.52, 28% upside, c.2% yield. According to a news report, Berjaya Land’s (BL MK, NR) 70%-owned subsidiary Berjaya Rail has teamed up with IJM Corp’s (IJM MK, BUY, TP: MYR2.47) unit IJM Construction, Malaysian Resources Corp, and national railway company Keretapi Tanah Melayu (KTMB) to submit a concept proposal for the Kuala Lumpur-Singapore high-speed rail (HSR) project.

• We believe such an arrangement for a consortium is apt for the concept proposal under the project’s request for information (RFI) exercise. MRC has rail credentials (Mass Rapid Transit (MRT) 2 and Light Rail Transit (LRT) 3) in addition to its role in redeveloping KL Sentral (subject to negotiations with the Government), which seems timely with the HSR’s potential rollout. If the HSR passes through KL Sentral, the redevelopment of KL Sentral could take place concurrently with the HSR. IJM could focus more on rail electrification works via its 44.8% acquisition of PESTECH International (PEST MK, NR; expected completion by Feb 2024).

• Other contenders. In the same news report, it was stated that YTL Corp (YTL MK, NR) has also submitted a concept proposal for the HSR project. This is not a surprise, as the group was the project delivery partner in a partnership with Tabung Haji Properties for the southern section of the HSR’s previous alignment in 2018. With the RFI still being in its early days (a detailed proposal stage will follow the concept proposal stage post evaluation by the authorities), various types of permutations could still take place before a final structure is decided. Therefore, a similar structure to that seen in 2018 (whereby HSR packages were divided into the northern and southern sections) cannot be ruled out.

• What’s next for MRC? Aside from the HSR catalyst, MRC’s pre-qualified status for a flood mitigation project (estimated at MYR500m-1bn) in Selangor could see further developments by 1H24, in our view, given the urgency to manage floods in the country. Other prospects may come from MRT3 – we think MRC has a chance to secure the elevated section, while the reinstatement of five LRT3 stations may also benefit the group, which is the main contractor for the ongoing construction of the 20 initial stations.

• Maintain earnings estimates. We ascribe a higher target P/E of 18x (from 11x) for MRC’s construction arm, reflecting the level that MRC was trading at during the mid-2017 construction upcycle. Taking into consideration the bright prospects mentioned above, we also lower our discount to RNAV to 40% from 55%. As a result, we arrived at our new SOP-derived MYR0.74 TP (inclusive of a 0% ESG premium/discount). While we project a 13% YoY earnings drop in FY23, MRC has an estimated 3-year earnings CAGR of 15% supported by its strong orderbook-to-revenue cover ratio of >10x and a land bank of 1,153 acres (MYR33bn GDV). Key downside risk: Sluggish project rollouts.

Source: RHB Research - 26 Jan 2024