News

• Enters JV to undertake ICQS job. MRCB announced that it has entered into a JV with DRB Hicom on a 51:49 basis to undertake the construction of the Immigration, Customs, Quarantine and Security (ICQS) Complex at Bukit Kayu Hitam, Kedah for RM310m.

• Project history. In May 2012, the construction works was awarded by Northern Gateway Infrastructure (NGI), the concessionaire of the ICQS Complex to the Zelan-Kiara Teratai JV for RM310m. The Zelan-Kiara Teratai JV has now in turn, awarded the construction works to the MRCB-DRB JV.

Comments

• Food for thought. Here are some facts to ponder upon regarding the project award structure. The construction works was awarded by NGI to the Zelan-Kiara Teratai JV only to be “subcontracted” to the MRCB-DRB JV more than 3 years later at the same price tag of RM310m. Interestingly, Malaysian tycoon, Tan Sri Syed Mokhtar is deemed as a connected person in all 3 entities either via (i) direct shareholding (DRB Hicom), (ii) indirect shareholding (Zelan via MMC Corp), (iii) shareholding held by a connected personal (Kiara Teratai) and (iv) directorship held by a connected personal (NGI). Note that items (iii) and (iv) above are based on previous announcements by Zelan.

• Orderbook replenishing well. Including the ICQS Complex job (based on its 51% stake of RM158m), MRCB’s orderbook replenishment stands at RM643m YTD. Another major project that could be on the cards is the PDP role for the LRT3 (RM9bn) in which the MRCB-George Kent JV is touted to be the frontrunner.

Risks

• EPS dilution from an inevitable looming cash call.

Forecasts

• Given that YTD job wins of RM643m has surpassed our full year target of RM500m, there is now an upside bias to our earnings estimates which will be reviewed in due course.

Rating

BUY TP: RM1.70

• 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 RM1.70 is based on the SOP method which implies 39.1x FY15 PE but a more palatable 25.7x on FY16 once earnings momentum starts to set in.

Source: Hong Leong Investment Bank Research - 9 Jul 2015