News

• MRCB announced that it has been appointed as the management contractor in connection with the development of 3 parcels of leasehold land totalling 76.1 acres in Bukit Jalil. The management contract is for a provisional sum of RM11bn which largely comprises of RM8.5bn for the EPCC works while the balance is made up of other items such as professional fees, consultancy, overheads and GST.

Comments

• Development background. The said 3 parcels of lands are currently owned by MRCB’s 85% subsidiary, Rukun Juang SB (RJSB). These lands were payment to MRCB for building the National Sports Complex in Bukit Jalil. In May 2017, an agreement was reached whereby the development of the said lands will be done via a JV in which EPF would hold 80% and RJSB 20%. Effectively, MRCB’s stake in the JV undertaking the development would be 17% (via its 85% stake in RJSB).

• 2 bites from the same cherry. The appointment of MRCB as management contractor of the development enables it to enjoy (i) consolidated construction profits during the construction stage and (ii) eventual development profits. However, we note that for the development profits, this is likely to be recognised only when dividends are paid by the JV. Given MRCB’s effective stake of only 17% in the JV, it would be unable to equity account any of the profits.

• Ongoing stream of construction works. Given that the development will span over 20 years, this would present MRCB with an ongoing flow of construction works over the period. This would also help reduce MRCB’s orderbook replenishment susceptibility to the ebb and flow of the construction job flows. Assuming the EPCC sum is spread equally over 20 years, this would present MRCB with RM425m worth of construction works to undertake from the development annually.

Risks

• Volatile core earnings delivery from quarter to quarter.

Forecasts

• Unchanged as we believe any significant recognition from the management contract is unlikely to happen in the next 2 years.

Rating

Maintain BUY, TP: RM1.31

• Given its healthier balance sheet post rights issue, we reckon that MRCB is now in a much better position to execute its various catalytic projects. The disposal of EDL should serve as a near term catalyst.

Valuation

• Our SOP based TP of RM1.31 is unchanged.

Source: Hong Leong Investment Bank Research - 27 Mar 2018