News   In an announcement made by Fajarbaru Builder Group Bhd  (FGB, UP, TP: RM 0.51), MRCB's wholly-owned subsidiary, MESB had terminated the sub-contract works of the Ampang Line Extension Work to FGB. At the same time, Prasarana had taken over the liability and cost of the project and awarded the project to FGB. The contract value is worth RM289m. It was mutually agreed between Prasarana and MESB that the project value would be omitted from the earlier main contract award to MRCB of RM1.3b.  

  

Comments   This news is a negative development for MRCB. This will shrink its existing order book by RM289m. Its current order book stands at c.RM1.4b. To recap, MRCB had secured the contract from Prasarana for the extension of the Ampang Line LRT project (Package B) worth RM1.3b. MRCB subsequently subcontracted the construction of the depot (under the same package) to FGB worth RM289m. 

 We understand that the margin for the project is minimal at c.3% to 4%. The site progress is behind schedule due to delays in site possession. Based on management guidance, thus far, the contribution from the project in FY12 was negligible. This is in line with our assumption as we had already rolled over the recognition to FY2013.

 We think that there could be more unfavourable news that could come out in the near term for MRCB. It is likely that MRCB will have to make a c.RM44m provision in its upcoming 4Q12 results due to the damages claim by Juranas Sdn Bhd in December 2012. 

  

Outlook  In the near term, there will be less excitement or even possibly more negative surprises to the construction sector due to the election risk.

 However, on a longer term outlook, the upside for MRCB's earnings should emerge post the elections, possibly from the development of the RRI land and land banks injection from its potential new shareholders. 

  

Forecast  We have reduced our FY13E by 11% as we stripped out the RM289m contract value from its existing order book.

  

Rating    Maintain OUTPERFORM

 We are maintaining our  OUTPERFORM recommendation as we expect MRCB to be the likely beneficiary of post-election events.

  

Valuation   We have reduced our Target Price from RM2.22 to RM2.16 based on a SOP valuation.

  

Risks  Delays in securing more land banks and cost overruns at its ongoing projects due to construction delays.

Source: Kenanga