- We reaffirmed our BUY rating on MRCB and raised our fair value from RM1.65/share to RM2.12/share – based on lower discount of 35% (previous: 40%) to our revised NAV of RM3.25/share. We have also raised our NAV to account for the accretion to its asset value from its recent prolific infrastructure/land deals: i.e. the (i) Bukit Jalil; (ii) Phase 1 of Cyberjaya City Centre (CCC); (iii) Kwasa Utama management contract; and (iv) LRT 3 PDP project.

- MRCB is approaching the tail-end of its restructuring moves to optimize its corporate structure, balance sheet and growth trajectory, under the stewardship of the entrepreneurial management team from Gapurna. 2016 would be a liftoff year; MRCB would be moving from restructuring to growth, giving its share price a big kick.

- For a start, MRCB is leveraging on the success of KL Sentral to elevate itself as the premier transport-oriented developer (TOD). The emphasis is on railway (MRT and LRT) accessibility and connectivity in urbanized areas and the city centre to drive end-user demand and inward migration. This is the key differentiating factor for MRCB.

- Consider the Bukit Jalil (KL Sports City) and CCC land. To underscore this point, rental rates at KL Sentral have stayed firmed due to its status as a transport hub and long-term tenancies. The early success of KL Sentral will now be replicated across these new projects. With the recent land deals, MRCB’s landbank GDV has swelled to RM45bil from just RM11bil prior to the injection of the Nusa Gapurna lands.

- MRCB has consciously taken concrete steps to strengthen its construction division. A major earnings drag in the past, it is now leaner with a newfound focus on infrastructure works and more importantly: fee income from the LRT 3, CCC and Kwasa Utama contracts.

- The latter could be worth RM546mil over the next twelve years, making up a quarter of its external orderbook of RM2.3bil and a healthy orderbook cover of 4.5x. Ytd, MRCB has secured ~RM1.5bil worth of new contracts.

- MRCB is cognizant of the need to deleverage its balance sheet. We estimate its FY16F net gearing would rise to 1.6x (FY15F: 1.1x) once it fulfills its commitments for the ex-German embassy and MX-1 (Kwasa Damansara) lands.

- But, we are not unduly concerned. Capital locked-up in all its investment properties would be recycled into its REIT, with the proceeds redeployed to fund its higher ROE landbanking deals. Menara Shell (RM607mil) may be next to be injected, followed by Ascott Residences (RM114mil). MRCB is also exploring the creation of private property funds with select institutional investors to co-finance its development projects.

Source: AmeSecurities Research - 9 Nov 2015