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Author: kltrader   |   Latest post: Tue, 15 Oct 2019, 10:21 AM

 

MQ Research: Maintain Outperform on MRCB, TP Revised

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Macquarie Equities Research (MQ Research) wrote a report (1 Feb) on Malaysian Resources Corporation (MRCB), revising its target price (TP) to RM0.90, while maintaining an Outperform rating on the company. MQ Research highlighted that MRCB will focus on waste-to-energy (WTE) related projects this year, which is a price catalyst for the company.

Event

  • MQ Research rolls forward MRCB’s valuation to FY19E with a revised TP of RM0.90 from RM1.00 previously, maintaining its Outperform rating on the company. MRCB went through 2018 completing two substantial milestones – i) it sold the Eastern Dispersal Link (EDL) highway to the government; and ii) it divested its stake in Bukit Jalil Sentral development to Employee Provident Fund (EPF).
  • MQ Research estimates these two transactions have reduced MRCB’s net gearing from 54% (FY17) to 22% in FY18. Given that the 5-year overhaul of the company is complete, MQ Research believes in FY19E management should focus on growing its earnings and expanding its business capacities, supported by its strong balance sheet.

Impact

  • Orderbook balance of RM22bn, already secured RM323mn of new orders in FY19E. MRCB has an estimated orderbook balance of RM22bn, with the majority of the jobs circling around the project management scope. While the project management earnings recognition could stretch up to 15 years from now, MRCB expects MRCB’s infra projects will drive its earnings in the short term. Having already secured the Package CA2 from the DASH project, MQ Research assumes an order win target of RM500mn/FY in FY19-21E.
  • MRCB Construction listing seems feasible with strong orderbook balance. Management began talks of listing MRCB Construction since FY16, but it has been waiting for its earnings to grow significantly in hopes to list the division with a >RM1bn market cap. Given that the division is now sitting on a hefty orderbook, management could reignite its plans to list the construction division as stronger earnings could anchor better valuations for the company.
  • WTE is lucrative, but MRCB needs a solid waste operator to optimise operations. Management indicated that in FY19E it will focus on WTE related projects. MQ Research believes MRCB’s venture into WTE could be lucrative, given that MRCB could profit from the construction of the plant, tipping fees and supplying power to the national grid. However, MQ Research believes that MRCB would need a partner to optimise the operations of its future WTE.

Earnings and Target Price Revision

  • Roll forward estimates, FY18-21E earnings per share (EPS) moved by -15%/+18%/+14%. TP reduced by 10% from RM1.00 to RM0.90 implying a 20x price-to-earnings ratio to FY20E EPS.

Price Catalyst

  • 12-month price target: RM0.90 based on a Sum of Parts methodology.
  • Catalyst: WTE contract awards in Malaysia

Action and Recommendation

  • Outperform rating reiterated.

Source: Macquarie Research - 12 Feb 2019

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