MRCB (Buy-TP RM1.31) plunged 21.5% to RM0.785 following a broad selloff in the construction sector amid fears of the new PH government would review the on-going and upcoming mega projects. We expect a relief rally soon after the selling climax yesterday as MRCB’s fundamentals remain intact, backed by EPF (major shareholder with 34.9% stake), a strong ~RM6bn orderbook (excluding recently awarded KL-Singapore HSR PDP contract), disposals of EDL together with Menara Celcom and Ascott (by end 2018) to improve balance sheet.

MRCB nosedived 21.5% to RM0.785 amid broad selloff in construction stocks. Tracking major rout in construction and infrastructure companies in wake of concern that the change in new PH government is likely to translate into uncertainties pertaining to the continuity of mega projects (ongoing and upcoming) that were initiated by the previous administration.

Selling overdone? Following a 40% plunge from YTD high of RM1.31 (8 Jan) to RM0.785 yesterday, we believe further severe downside risks are ebbing given HLIB SOP TP of RM1.31 (+66.8% upside), healthier balance sheet post rights issue, undemanding 0.71x P/B (52% below its 10Y average) and a strong 13.5% earnings CAGR for FY17-19. Moreover, its ~RM6bn orderbook (excluding recently awarded JV KL-Singapore HSR PDP with Gamuda), FY18 tenderbook of ~RM2.0bn (focusing on more civil engineering and long term fee-based contracts) coupled with ~RM1.2bn unbilled property sales will provide at least 3-4 years of earnings visibility.

EPF, the single largest shareholder. Further selldown is also likely to be cushioned by the reputable shareholder, EPF and the monetisation of EDL. With EPF holding a 34.9% stake, MRCB’s well-being indirectly augurs well for unit holders of the retirement fund (i.e. the Rakyat). We reckon that this should provide some comfort that the recent regime change during GE14 should not result to negative ramifications to MRCB from a fundamental standpoint.

Monetisation of EDL is another potential catalyst. Following the abolishment of toll collections for the EDL from 1 Jan 18, we expect the government to buy out the expressway or compensate MRCB based on traffic flows on the highway. Management estimates that the disposal of EDL, together with Menara Celcom and Ascott (by end 2018) could potentially transform its balance sheet into a net cash position (from net gearing of 0.53x in FY17), thereby in a much better position to execute its various catalytic projects such as embarking on the maiden launches of its key transit-oriented developments (TOD) projects – Kwasa Sentral and Bukit Jalil Sentral, both with a combined GDV of ~RM22bn.

Anticipate a relief bounce after yesterday’s selling climax? In view of possible selling climax yesterday with a huge 138m shares transacted (against average 1M and 3M shares of 8m and 12m, respectively), there are signs of potential downtrend reversal, supported by the toppish –DMI and rising ADX (daily chart) coupled with the bottoming up hourly indicators. A strong breakout above RM0.80 barrier is likely to spur prices higher towards RM0.83 (23.6% FR) and RM0.90 (50% FR) before reaching our LT objective at RM1.00 psychological levels. On the flip side, key supports are situated at RM0.755 (14 May low) and RM0.695 (25 Aug low). Cut loss at RM0.69.

Source: Hong Leong Investment Bank Research - 15 May 2018