News

• MRCB announced that it has entered into a share swap agreement with DMIA where it will transfer its 100% equity interest in Lotus Terrain SB (“LT”) to the latter. In exchange, DMIA will transfer its 30% stake in Country Annexe SB (“CA”) to MRCB.

• In a separate proposal, MRCB will dispose its 70% stake in Paradigma Berkat SB (“PB”) to DMIA for RM39m.

Comments

• Swapping KV Double Track upgrade… In March 2013, a Letter of Intent (LOI) for the Klang Valley Double Track upgrade (RM480m) was issued to MRCB and DMAI. Subsequently, MRCB and DMAI entered into a shareholder’s agreement whereby it was agreed that LT would be the company to undertake the job. With 100% stake in LT swapped to DMAI, MRCB is effectively relinquishing its role for the job (at least at the main contractor level) should the LOI be converted into an award. Nonetheless, we do not discount MRCB participating in the job as a subcontractor to LT (i.e. DMAI).

• ...for full control of Lot 349, Brickfields. In exchange for giving its 100% stake in LT to DMAI, MRCB will receive a 30% stake in CA. As MRCB already owns 70% of CA, it will have full control over the latter post share swap. CA has been identified as the company that will undertake a mixed development on a 4.9 acre land in Brickfields. This plot of land had been code named Lot 349 in MRCB’s development plans with an estimated GDV of RM1.3bn, largely comprising service apartments.

• No go for Salak South. The disposal of MRCB’s 70% stake PB will mean that it will no longer have an exposure to its previously proposed mixed development in Salak South measuring 24.5 acres. This project was estimated to have an overall GDV of RM2.1bn with Phase 1 at RM280m. The disposal will have minimal impact on net gearing, reducing it from 153% to 151% on a proforma basis.

Risks

• EPS dilution from an inevitable looming cash call.

Forecasts

• No changes to our forecasts. We have not factored in the Double Track contract or any development profits from Brickfields or Salak South to begin with.

Rating

BUY TP: RM1.88

• We are giving MRCB’s new management the benefit of the doubt that it can successfully turn the company around in the long term. Catalysts include successful launch of Kwasa Damansara and winning the PDP role for LRT3.

Valuation

• TP of RM1.88 is based on the SOP method which implies 30x FY15 PE but a more palatable 19.3x on FY16 once earnings momentum starts to set in.

Source: Hong Leong Investment Bank Research - 1 Apr 2015