Highlights

We attended a small group meeting with MRCB’s key representatives and returned with a positive note on the longer term prospects of the company. Below are the key takeaways:

Started with 348... Management explained that the partnership with Gapurna started off with 348 Sentral whereby Gapurna played a crucial role in securing Shell as the anchor tenant which was won under an international bid. Thereafter, it attracted the attention of EPF to JV with Gapurna for other developments, which has led to the current proposed share swap deal. Instead of short term JV partnerships, we are positive that Gapurna’s skin is also in the game and more viable for MRCB’s longer term prospects whereby it is a marriage between MRCB’s balance sheet (post disposal of EDL) and Gapurna’s entrepreneur skills.

En bloc... Gapurna has shown its en bloc sales expertise by selling 2 tower blocks to MBSB (RM240m) and MyIPO (RM250m) while securing Celcom under a long term lease (GDV: RM383m). Collectively, this has made up 30% of PJ Sentral’s RM2.9bn GDV.

Continuity... Without Gapurna’s land bank, MRCB’s next biggest development will be from Setapak (GDV: RM2.5bn). However, it has yet to be launched while it will take a while before the remaining 2 parcels of land in KL Sentral can be developed. Hence, Gapurna’s land banks which have already obtained the necessary approvals are ready for launching and will provide earnings continuity to MRCB despite the short term earnings dilution (see Figure #1).

Construction... Management acknowledges that the construction division has been its weakest link and suggests better cost controls going forward. We believe that with RM50m write off in 4Q, the division will emerge with a clean slate. Contract flows may have to wait till after the election.

EDL Privatisation... The bid-ask price between the Government and MRCB has been narrowing after many rounds of negotiations. Likewise, the final offer will most likely occur after the election.

Risks

Execution risk; Regulatory and political risk; Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Trimmed FY13 EPS by 15% due to dilution arising from Nusa-Gapurna share swap while raising FY14 EPS by 11% due to stronger development profits from Nusa Gapurna.

Rating

BUY

• Positives: (1) New construction contract wins; (2) Acquiring strategic land banks; (3) Favourable buyout terms for EDL.
• Negatives: (1) Concerns over execution for projects; (2) Concerns over take-up rates for property launches; (3) Delays by the Government to buyout EDL; (4) High net gearing levels; (5) Short-term earnings dilution arising from share swap with Gapurna.

Valuation

Target Price trimmed slightly by 2.9% to RM2.15 based on Sum-of-Parts Valuation mainly due to lower valuation assigned to the property division.

Source: Hong Leong Investment Bank Research - 27 Mar 2013