Malaysian Resources Corp Bhd (MRCB) has agreed to terminate its Eastern Dispersal Link Expressway (EDL) concession for cash compensation of RM1,325.8m from the government. We view this long-awaited deal positively as it will lead to interest cost savings, a one-off gain of RM24m and reduce net gearing to 0.28x from 0.53x as at end-2017. We upgrade our core EPS forecasts by 10-14% in FY19- 20E and lift our TP to RM0.90 from RM0.88, based on a 40% discount to RNAV. Maintain our BUY call.

Deal Struck

MRCB has entered into a termination and settlement agreement for its EDL concession with The Government of Malaysia (GOM). GOM will pay RM1,325.8m to MRCB. The total cost and net book value of EDL service concession assets are about RM1,326.57m and RM1,135.28m respectively. MRCB expects a net pro forma gain of RM24.05m from the early settlement of the concession debt.

Positive for Earnings and Financial Position

We view the concession termination agreement positively as it will reduce the group’s net gearing of 0.53x at end-2017 to 0.28x. After settling the EDL concession debts of RM1,074.2m and other expenses, MRCB will receive RM226.58m cash that can be deployed to finance its other projects such as Kwasa Sentral and Cyberjaya City Centre. The one-off gain of RM24m will also lift FY19E earnings assuming the deal is completed in 1Q19. There is also interest cost savings in FY19-20E with the early settlement of the Senior and Junior Sukuk totaling RM1.07bn (high interest rates of 6.3-10.4% p.a.).

Core EPS Upgrade

We revise core EPS up by 10% in FY19E and 14% in FY20E to reflect the interest cost savings from the repayment of EDL debt and the new contract value agreed by GOM of RM11.9bn for the LRT Line 3 (LRT3) project. We raise our RNAV/share estimate to RM1.50 from RM1.46 to reflect the lower net debt.

BUY With Higher TP of RM0.90

We reiterate our BUY call on MRCB with our target price raised to RM0.90 from RM0.88, based on the same 40% discount to RNAV. We expect the clearing of uncertainties on the EDL and LRT3 projects will potentially lead to a relief rally for the share price.

Source: Affin Hwang Research - 13 Nov 2018