MGB through its subsidiary, MGB International For Industry (MGBI) has entered into a joint venture agreement (JVA) with SANY Alameriah Industrial (SA) to supply and install a combined total of 270,000m³ precast concrete products in phases, over a period of 3 years. Note that, this JVA will supersede and replace the Memorandum of Understanding (MOU) entered between SANY Alameriah and MGB in Jan 2023. We expect contract award would take place by 4QFY23. Assuming low-teen margins as well as a base corporate tax rate in Saudi Arabia of 20%, the potential contract is estimated to contribute c. 12% on average per annum to the Group’s bottomline from FY24 - FY26 (assuming award to take place in 4QFY23 and contract to last over a period of 3 years) based on certain levels of orders each year. All told, we maintain our earnings forecast pending our meeting with the Management. Our Outperform call is affirmed with an unchanged SOTP derived TP of RM1.03 pegged at 8x PER, below 15x PER sector average, given MGB’s smaller size.

• Salient details of the JVA. It is anticipated that SA would secure supply and installation contracts for a total aggregate minimum amount of 270,0000m³ of precast concrete products within 3 years from the commencement date. The commencement date refers to the 90 working days transition period starting from July 27, 2023. During the first year from the commencement date, SA is required to secure a minimum order of 90,0000m³ of precast concrete products.
  It is also imperative that MGBI would operate SA’s precast concrete factory located in Jeddah for the production of precast concrete products and works to be carried out by MGBI pursuant to the purchase orders issued by SA to MGBI to cater for the supply and installation contract within Saudi Arabia. In return, MGBI will inject approximately SAR10-20m or equivalent to RM12- 24m (assuming SAR1=RM1.2) as working capital to operate the said factory.

• Tenderbook effectively jumps >50%. The contract as outlined in the JVA is expected to add approximately RM326.7m (considering 50% of contract value net to MGB, 1m³ of precast concrete = SAR2,000 and SAR1 = RM1.2), bringing the Group’s existing tenderbook to RM926.7m on top of the ~4 active tenders worth RM600m as outlined in our previous report on July 25. MGB’s YTD orderbook replenishment stood at RM203.6m, representing 40.2% of FY23 orderbook replenishment assumption of RM500m.

• Earnings outlook. Assuming low-teen margins as well as a base corporate tax rate in Saudi Arabia of 20%, the potential contract is estimated to contribute c. 12% on average per annum to the Group’s bottomline from FY24 - FY26 (assuming award to take place in 4QFY23 and contract to last over a period of 3 years) based on certain levels of orders each year. We make no adjustment to our earnings estimates however, pending further guidance from the management.

• Our take. We are positive with MGB’s success in expanding its footprint in the Middle East via the JVA with SANY Alameriah. Additionally, through this contract award, we believe MGB would receive a wider recognition of its IBS capability which could bode well for the Group as the domestic construction landscape transitions into efficient off-site manufacturing.

Source: PublicInvest Research - 28 Jul 2023