MRCB announced that it has entered into a termination and settlement agreement regarding Eastern Dispersal Link Expressway (EDL) with the government. Pursuant to the Termination Agreement, the government will pay MRCB total settlement sum of c.RM1.32bn. The settlement sum is above our original expectation as we only expect compensation sum to be similar with net book value of the concession asset. The compensation is expected to reduce MRCB’s net gearing to 0.43x (from 0.69x as at 1H18) and results in finance cost savings of c.RM80m per annum. Raise earnings forecast by 12-22% after imputing lower finance costs due to repayment of Sukuk amounting to c.RM1.0bn that is related to EDL. Maintain HOLD with higher SOP-drive TP of RM0.71 (from RM0.60). Our TP is pegged to a lower 20% discount to SOP (30% previously) due to improved prospects after finalisation of LRT3 contract and EDL disposal coupled with stronger balance sheet going forward.

NEWSBREAK

RM1.32bn settlement sum. MRCB announced that it has entered into a termination and settlement agreement regarding Eastern Dispersal Link Expressway (EDL) with the Government. Pursuant to the Termination Agreement, the Government will pay MRCB total settlement sum of c.RM1.32bn.

HLIB’s VIEW

Positive but not surprise. We are not surprised on this announcement as the settlement sum was mentioned in the budget speech. The settlement sum is above our original expectation as we only expect compensation sum to be similar with net book value of the concession asset which is c.RM1.1bn.

Healthier balance sheet. The compensation is expected to reduce MRCB’s net gearing to 0.43x (from 0.69x as at 1H18) and result in finance cost savings of c.RM80m per annum. Besides, one-off realisation of c.RM24m unamortised gain of Junior Sukuk is expect to be recognised.

More de-gearing initiatives. We expect more upcoming de-gearing initiatives for the company such as EPF’s subscription in Bukit Jalil Sentral, disposal of Ascott and disposal of Menara Celcom. Net-gearing is expected to further come down to 0.22x upon completion of above-mentioned events.

Forecast. Increase FY19-20 earnings forecast by 11.6% and 22.1% respectively after imputing lower finance costs due to repayment of Sukuk amounted to c.RM1.0bn that is related to EDL.

Maintain HOLD, TP: RM0.71. Maintain HOLD rating with higher SOP-driven TP of RM0.71 (from RM0.60) following earnings forecast adjustment. We use book value for investment properties valuation instead of income capitalisation method previously in order to better reflect the market value of those assets. Our TP is pegged to a lower 20% discount to SOP (30% previously) due to improved prospects after finalisation of LRT3 contract and EDL disposal coupled with stronger balance sheet going forward.

Source: Hong Leong Investment Bank Research - 13 Nov 2018