News

• Management contract from parent-co… MRCB has entered into a management contract worth RM3.1bn with Kwasa Utama Sdn Bhd (KUSB). The management contract is in relation to the construction of a commercial development, named Kwasa Utama, on a piece of 29.8 acre land owned by KUSB (known as Plot C8) in Kwasa Damansara. As KUSB is wholly owned by EPF, which in turn, is the largest shareholder in MRCB (38.4% stake), the management contract is deemed as a related party transaction (RPT).

• ...and privatisation agreement. Separately, MRCB also announced that it entered into a privatisation agreement with the Ministry of Youth and Sports in relation to the refurbishment and upgrading of facilities at the National Sports Complex in Bukit Jalil for a contract sum of RM1.6bn which consist of (i) upgrading the existing National Sports Complex for RM499m; (ii) new sports complex, sports mall, convention centre, multi storey car park, hostel, sports museum, library and youth park for RM1.1bn; and (iii) balance sum of RM32m to be paid to the Government in cash. In return for the above 3 items, MRCB will be given 3 plots of leasehold land in Bukit Jalil totalling 92.5 acres.

Comments

• Steady stream of jobs for the next decade. Although the management contract with KUSB is indeed sizable at RM3.1bn, the impact to earnings in the near term is unlikely to be profound as its duration will be spread across 12 years. That said, we are positive on this contract win as it would provide MRCB a steady stream of work flow for over a decade. Assuming work is conducted equally across its targeted duration, the contract would feed MRCB with RM262m worth of jobs p.a. from 2016 to 2027.

• Boosting job wins significantly. The National Sports Complex upgrading job significantly boosts MRCB’s YTD job wins to RM2.2bn. This in turn, would bring its orderbook to RM3.1bn (excluding the management contract and LRT3 PDP role). Overall, this translates to a superior orderbook cover ratio of 6x on FY14 construction revenue.

Risks

• EPS dilution from an inevitable looming cash call and high net gearing.

Forecasts

• As YTD job wins have significantly exceeded our full year target of RM500m, there is certainly an upside bias to our earnings forecast, pending further clarification.

Rating

BUY TP: RM1.36

• These contracts along with the Cyberjaya City Centre development will serve as a positive share price catalyst.

Valuation

• TP of RM1.36 is based on the SOP method which implies 31.3x FY15 P/E but a more palatable 20.6x on FY16 once earnings momentum starts to set in.

Source: Hong Leong Investment Bank Research - 29 Oct 2015