News

• Hosts investor’s briefing. MRCB held an investor’s briefing yesterday which was hosted by its Executive Director, Mohd Imran Salim and CFO, Ann Wan Tee. The discussion was centred around: (i) the Cyberjaya City Centre (CCC) development; (ii) National Sports Complex redevelopment ; (iii) management contract with Kwasa Utama; and (iv) PDP role for the LRT3.

• Landbanking heavily. MRCB’s landbanking will require total funding of RM1.8bn which consists of: (i) RM817m for parcel MX-1 in Kwasa Damansara; (ii) RM499m for the redevelopment of the National Sports Complex Phase 1; (iii) RM270m for CCC; and (iv) RM259m for the German Embassy land.

• No cash call needed. Management shared that it will not be embarking on a cash call to fund these land acquisitions. Part of the funding requirements will be fulfilled via the injection of its current buildings into MRCB-Quill REIT. We gather that Shell Tower and Ascott Residence could be the next to be injected, potentially raising RM900m. Another option that MRCB is exploring is to set up a property development fund. Under this structure, external investors will be invited to take a stake in the fund which will then undertake the developments. Apart from having a stake in the fund, MRCB will also receive a fee for managing the fund’s property developments.

• Unable to book construction profits. As part of the National Sports Complex privatisation agreement, MRCB will be required to: (i) refurbish the existing complex for RM499m; (ii) construct new facilities for RM1.1bn; and (ii) pay RM32m to the Government in return for 92.5 acres of land in Bukit Jalil. Management clarified that the refurbishment works will be carried out from now until Aug 2017 in time for the SEA Games while construction of the new facilities would only commence after that. Cont rary to our earlier believe, MRCB will not be able to book in construction profits for the job as it is done in exchange for land.

Risks

• Execution is a key risk as these projects have a long gestation period before significantly contributing to earnings.

Forecasts

• Unchanged given minimal impact to near term earnings.

Rating

BUY TP: RM1.70

• Whilst still in its early days, we reckon that MRCB’s new management is on the right path (albeit at a slow pace) to turn the company around. Expect more positive news flow in the coming months.

Valuation

• With risk of a cash call reduced, we remove our 20% discount to SOP which raises our TP from RM1.36 to RM1.70. This implies an expensive FY15 P/E of 39.1x but reduces to 25.7x and 20.4x for FY16-17 once its earnings recovery sets in.

Source: Hong Leong Investment Bank Research - 13 Nov 2015