- We maintain our BUY call on MRCB with a fair value of RM1.65/share on an unchanged 40% to its NAV. MRCB announced that it has received a letter of appointment from Prasarana Malaysia to act as the Project Delivery Partner (PDP) for the Klang Valley LRT 3 (LRT3) project under a 50:50 JV with George Kent (Malaysia) Bhd.

- The LRT3 project (36km) runs from Bandar Utama to Klang before terminating at Johan Setia in Klang. Earlier reports indicated that this new line is expected to cost ~RM9bil (targeted completion: 2020)

- The award validates our earlier conviction of the MRCBGeorge Kent JV’s status as a frontrunner for the LRT3 PDP role. Our optimism stemmed from the duo’s combined experience in railworks. MRCB is the developer of the KL Sentral Transport Hub, and is exporting its franchise in Penang via Penang Sentral.

- The group is also currently undertaking several LRT packages under the Klang Valley LRT Line extension worth a combined RM1.2bil. These are:- (i) Ampang Line Package B – main facilities & segmental box girdles [SBG] (RM994mil); (ii) Kelana Jaya Package B SBG (RM77mil); and (iii) LRT stations 6&7 (RM88mil).

- George Kent had won a system works job for the Ampang LRT line extension last July together with Lion Pacific. From our channel checks, the JV trumped six other shortlisted candidates for the PDP award.

- While we have lowered our FY15F net profit to account for some timing differences, our NAV is largely intact. Even without accounting for the LRT3 PDP, MRCB’s new contract wins YTD of RM643mil has already surpassed our previous assumptions of RM300mil.

- Assuming a contract value of RM9bil (MRCB’s 50% stake: ~RM4.5bil), this new job could further boost the group’s total new contracts achieved YTD to ~RM5.1bil and bump up its external order book to a record RM6bil. This would undoubtedly boost MRCB’s future construction prospects going forward.

- Based on:- (i) MRCB’s effective stake in the PDP (~RM4.5bil); (ii) PDP fee of 5% (vs. 6% for the MRT Line 1 project); and (iii) duration of five years (2016-2020), we estimate the LRT3 PDP contract to bump up MRCB’s FY16F/17F core net profit by 21%/35%. Its fair value will rise by ~6% to RM1.75/share (NPV@7%).

- We have not assumed any contributions from the LRT3 project pending a definite agreement to be executed between the MRCB-George Kent JV and Prasarana. The stock is currently trading at a steep 64% discount to its NAV.

Source: AmeSecurities Research - 7 Sep 2015