News

To dispose its 100%-owned security surveillance company, GTC Global S/B (GTC), to Telekom Malaysia Bhd (TM) for RM45m. The disposal is expected to be completed by 1QFY14.

Highlights

Positive move… We are POSITIVE on the disposal as it frees up MRCB’s resources to focus on the larger scale projects and core operations namely construction and property development projects.

Recap… GTC was acquired by MRCB during the merger exercise with Nusa Gapurna (kindly refer to our report “MRCB inks Gapurna partnership” dated 13 Feb-13). MRCB acquired GTC for RM20m whereby RM3m was in cash while the balance of RM17m in the form of 10.97m newly issued MRCB shares valued at RM1.55 each, attached with 3.1m 5- year warrants with an exercise price of RM2.30.

Valuations… Based on GTC’s FYE Dec-12 financials, the company posted PAT of RM3.5m and has a net asset of RM44.7m. Hence, this works out to a P/E of 12.9x and P/BV of 1x. Moreover, GTC has long-term contracts worth RM445m. We believe that the valuation is fair when compared to the smaller cap engineering/construction firms which is trading at 8-12x P/E.

Immaterial… We treat the disposal as a one-off gain and not part of MRCB’s core earnings. The RM45m proceeds raised does not have a material impact on MRCB’s balance sheet as it has a net debt of RM2.7bn (as of 1HFY13).

More asset rationalisation…We take this development as a precursor towards more disposal of non-core low yielding assets to streamline MRCB’s operations. We believe that the DUKE (30% stake) and EDL (100% stake) highways coupled with selected investment properties may follow suit.

Risks

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

Forecasts

Unchanged.

Rating

BUY

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

Positives: (1) Success in acquiring PJ Sentral land; (2) New construction contract wins; (3) Acquiring strategic land banks; (4) Favourable 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 - 28 Nov 2013