Stock Name: MRCB
Company Name: MALAYSIAN RESOURCES CORP
Research House: HWANGDBS

Malaysian Resources Corp Bhd
(Nov 3, RM2.07)
Maintain buy at RM2.04 with target price of RM2.90: MRCB's share price has risen 59% year-to-date (YTD) but there is more upside. We raised FY11/FY12F earnings by 13% to 27% after imputing larger new contract wins of RM600 million per year (against'' RM400 to RM600 million previously), and the launch of Lot D in 2H11 (GDV RM1.2 billion; ASP RM900 to psf RM1,200 psf, JV with CapitaLand and Quill).

Consequently, we raise our target price (TP) to RM2.90, also accounting for: (i) higher RM1,200 psf average selling price (ASP) for the remaining 12 acres of land in KL Sentral premised on a scarcity premium for the strong maturing franchise. The last benchmark for offices was Lot G at more than RM1,000 psf, similar for recent strata units of Lot B; (ii) higher values for its concessions, EDL and Duke, and (iii) inclusion of building services business at 10 times CY11 PER.

Pending a formal participation in the RRIM land, MRCB seems set to capitalise on more 10th Malaysia Plan projects, which carry stronger emphasis on environmental projects. We expect MRCB to be able to carve out the most lucrative portion of the land which is the transport hub and surrounding commercial development.

MRCB's completion of phase 1 of the Kuala Sungai Pahang project worth RM258 million and the RM20 million Kampung Perai, Penang River project will put it in the driver's seat to clinch the remaining RM1.2 billion and RM480 million of projects.

Other potential projects in the pipeline are: (i) LRT extensions; (ii) Klang river cleaning project as proposed by Pemandu; and (iii) Putrajaya building projects. We understand its shelved RM300 million Penang Sentral project will be revived with the eventual completion of the Ipoh-Padang Besar double tracking project in 2013.

With the MRT closer to receiving cabinet approval, MRCB's fortunes are even brighter with the red and green line converging at RRIM. It would benefit from: (i) better pricing power over our RM300 psf assumption. Every RM100 psf increase would raise our SOP by 7%; and (ii) it would likely receive a sizable portion of MRT construction works for the portion leading to the RRIM land.

Another wild card could be MRCB's involvement in the redevelopment of Pudu Jail given its prior works for Gaya Bangsar condominium.

We remain confident that with the Employees Provident Fund's strong shareholder backing, MRCB will have a strong role to play for the RRIM land. In Budget 2011, this development received special mention indicating the commitment to launch this project soon.

According to a recent media article, the EPF has initiated a masterplan for the land development, which is expected to take six months to a year to complete. As expected, the land will be sub-divided into several parcels which would benefit several local and also foreign developers.

This would be via an open tender system in 2H11. It appears that the master developer would likely be Kwasa Land Sdn Bhd, the JV between the government and EPF. We are not unduly disappointed if MRCB does not become the master developer given the prohibitive land cost of owning such a large land parcel.

But we expect MRCB to be able to carve out the most lucrative portion of the land, the transport hub and surrounding commercial development and'' high-rise and low-rise residential as per its KL Sentral development.

To recap, in our sum-of-parts (SOP) value, we assume the government will divide the 3,400 acres of land and award parcels to six developers or JV companies. Hence the MRCB-EPF JV (50:50) would end up with 567 acres. And we conservatively assume three times plot ratio and RM300 psf ASP, translating into a RM18 billion gross development value (GDV).

We think the reported development value of the RRIM land by the government of RM10 billion is way too conservative. In any case, once the land is parcelled out to the developers, they will determine the pricing.

Based on estimated land cost of RM10 psf, construction costs of RM180 psf, and other interest and holding costs, the breakeven cost is RM243 psf. For the purpose of our SOP value, we have assigned a 50% discount to our net present value (NPV) of development profits of RM2.3 billion.

Given that this development would have a key MRT station where the red and green lines would converge, we conducted a sensitivity analysis that assumes ASP beyond our base case of RM300 psf.

In each scenario, we assumed a RM100 psf increase in ASP with a corresponding RM30 to RM40 psf increase in construction costs from the base case of RM180 psf, to reflect the higher selling prices.

At the lower end of RM400 psf, our SOP-derived TP would be raised to RM3.09, while at the upper end of RM800 psf ASP, our TP would be raised to RM3.71. ' HwangDBS Vickers Research, Nov 3


This article appeared in The Edge Financial Daily, November 4, 2010.