News

Secured Phase 3 of the Sungai Pahang estuary rehabilitation project for RM130m from the Department of Irrigation and Drainage. The construction period is for 24 months and is expected to be completed by Sep-15.

Highlights

Ending the barren spell… This is a welcomed development for MRCB as it is the first project win announcement since Oct-11. Coincidently, the last announcement on a contract win was also for Sungai Pahang’s estuary rehabilitation project (Phase 2). MRCB has secured all three phases of this rehabilitation project. Phase 1 was worth RM258m while Phase 2 was smaller in size worth RM46.5m.

Decent size… The latest contract makes up 13% of its previous outstanding order book of ~RM1bn and ~25% of FY12’s construction and environmental revenue. Assuming a 10% net margin, the order translates to ~0.8 sen/share (after adjusting for additional shares of 263.5m arising from Nusa-Gapurna merger) for the company.

Niche in environmental jobs… MRCB will be focussing on creating a niche in specialised areas such as environmental engineering-related projects instead of building projects whereby competition is intense.

Earnings visibility… With the latest award, we estimate that MRCB has ~RM1.13bn worth of projects, translating to 2.2x FY12’s construction and environmental revenue. We estimate that ~71% (~RM800m) of its outstanding order book is made up of the LRT extension project.

Risks

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

Forecasts

Unchanged as the contract is already part of our RM800m FY13 annual order book replenishment assumption.

Rating

BUY

We remain optimistic on MRCB’s longer term prospects. Hence, we maintain our long term BUY call on the company.

Positives: (1) Successfully acquiring PJ Sentral development; (2) New construction contract wins; (3) Acquiring strategic land banks; (4) 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 Nusa Gapurna.

Valuation

Maintain Target Price of RM2.14 based on Sum-of-Parts Valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 2 Sep 2013