News

To acquire the remaining 51% stake in Penang Sentral from Pelaburan Hartanah Berhad (PHB) for RM50.751m. The purchase price was on the basis of future profits from the development of the Penang transport hub and mix development. The acquisition is expected to be completed by Sep-14.

Highlights

Strategic move… The Penang Sentral transportation hub was first mooted back in 2007. The development is located in Butterworth and spans over 23.3 acres with an estimated GDV of RM2bn. The first phase of the development is over 5.24 acres with a GDV of RM512m.

Mild positive… We are mildly positive over the acquisition as it will allow MRCB to have full control over the execution of the development as well as full earnings recognition. Moreover, we believe that the price is fair. Based on Phase 1’s GDV, the development profits work out to a PAT margin of 19.5%, which is within the range of property development profit margin of 20-25%.

Risks

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

Forecasts

Unchanged, pending more details of launches.

Rating

BUY

We remain optimistic that the new management will be able to turnaround MRCB’s operations and positive on the de-gearing exercise. Hence, we maintain our long term BUY call.

Positives:

(1) Success in acquiring PJ Sentral land; (2) New construction contract wins; and (3) Acquiring strategic land banks.

Negatives:

(1) Concerns over projects execution and property take-up rates; (2) Delays by the Government on EDL; (3) High net gearing levels; and (4) Short-term earnings dilution arising from share swap with Nusa Gapurna.

Valuation

Target Price maintained at RM2.02 based on Sum-of-Parts valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 25 Jul 2014