News

• Sells land to MRT Corp. MRCB has entered into a S&P agreement with MRT Corp to sell a parcel of its land to the latter for RM180m. The said land is located along Jalan Kia Peng, KL and measures 43,852 sq ft.

• Scraps development of The Grid. The land was previously slated for a service apartment development known as The Grid. However, as the MRT2 crosses directly below the land, the development would be exposed to higher risks of delays and cost overruns. Given such, MRCB has decided to sell the land instead of developing it.

Comments

• A setback for potential sales but... The Grid was supposed to have a GDV of RM415m with its initial target launch sometime this year. With the development now scrapped, we reckon that MRCB will find it increasingly more challenging to drive property sales. As it is, we estimate MRCB’s 1H property sales to stand at only RM166m down from RM412m over the same period last year. This is also a stark variance from its full year target of RM1bn.

• …disposed at an attractive price. We reckon that the offer of RM180m for the said land is attractive for MRCB as it works out to RM4,105 psf. To put things in perspective, in April 2015, MRCB purchased the German Embassy land, which is also located along Jln Kia Peng for RM3,188 psf. Using that as the base case, the land sale to MRT Corp would be done at a 29% premium.

• Slight reduction to net gearing. We estimate that the said land disposal would reduce net gearing slightly from the current 126% to 118% on a proforma basis.

Risks

• Consistency in core earnings delivery remains lacking from quarter to quarter.

Forecasts

• We estimate that land sale would result in a gain on disposal of RM114m. However, we make no changes to our core operational earnings forecast as the gain on disposal is regarded as a non-recurring exceptional item.

Rating

Maintain HOLD, TP: RM1.23

• Whilst there is certainly no lacking of catalytic projects that MRCB has in hand, the issue here as always, is about core earnings delivery.

Valuation

• Our SOP based TP (25% discount) of RM1.23 implies a significantly stretched P/E of >100x for FY16 and 42x for FY17. This becomes slightly more palatable in FY18 at 28x once its earnings start to kick in

Source: Hong Leong Investment Bank Research - 18 Nov 2016