We are upgrading MRCB to OUTPERFORM from MARKET PERFORM with a higher Target Price of RM2.01 from RM1.40 based on SOPderived valuation (30% discount). We met up with MRCB’s management recently for an update, especially after the re-emergence of catalysts namely: (i) Kwasa Land’s announcement on the RM50b Kwasa Damansara project and (ii) potential sale of one of its non-core assets, i.e. DUKE highway, which has recently been reflected in its share prices (+20.2%YTD). We came away from the meeting feeling positive and comfortable with the Group’s prospects. We also now believe that MRCB is executing its turnaround plans it shared in a previous analysts’ briefing. There are few major developments in the pipeline that will accrete the Group’s value namely: (i) disposal of its 30%-stake in DUKE highway to Ekovest (i.e. currently owned 70% of the highway), (ii) monetising its property investment portfolio worth more than RM1.5b via REITs, and (iii) higher possibility of replenishing its orderbook of about RM1.0b this year. On top of that, we believe the Kwasa Damansara news flows will further boost sentiment for MRCB this year. Hence, with more than 30% potential upside from current price, MRCB could be a “Dark Horse” of the year after being bashed down by investors due to negative news/development (i.e. huge provisions of RM167m due to poor executions, EDL “limbo”, PJ Sentral’s NGD-PKNS court tussle) last year. After re-visiting our SOPderived valuation, we have upgraded MRCB to OUTPERFORM with higher Target Price of RM2.01 (from RM1.40 previously).

Disposal of 30%-DUKE to be announced soon? Management is not denying the fact that it is currently in talks with Ekovest to dispose its 30% stake in DUKE highway. Based on various newspapers (i.e. The Edge and The Star) reports, MRCB might be disposing the asset at RM200m - RM230m. This means that the highway is valued at around RM667m - RM767m, which is in tandem with the valuation done by Ekovest’s independent valuer, BDO, of about RM647m – RM700m in October 2013. There will be a proper announcement with regards to this disposal which we believe will materialize in the short-term (1-3 months). We estimate MRCB’s net gain at RM130m, which will be utilized to pare down its debt.

To monetise its property investment through REITs. We also understand that MRCB is looking to inject its property investments valued at RM1.7b into REITs within this year. We view this positively as it will transfer RM1.0b of debts out of MRCB books. This “de-gearing” will improve MRCB’s balance sheet significantly i.e. net gearing to reduce substantially to 1.1x from 1.7x currently. Therefore, MRCB has room to gear up its capacity to expand its property business by landbanking in strategic location in Klang Valley and Penang.

Orderbook replenishment of RM1.0b this year? After the sluggish performance in its construction division (i.e. due to the absence of big contracts) in recent years, management is optimistic that the division will announce two big contracts (i.e. building-related project and KTMB track rehabilitation) this year worth RM1.0b. This will lift its existing orderbook of RM1.6b to RM2.6 which will support its construction earnings for the next 3-4 years.

Kwasa Damansara’s prime developer? Finally, the Kwasa Damansara (formerly known as Sungai Buloh Rubber Research Institute land) news came back into the picture after the project owner, Kwasa Land, made a press statement recently that it will be calling for a tender next month. Kwasa Land added that the project will generate RM50b GDV. Kwasa Damansara sits on 2,330 acres of landbank and it will be a “transit-oriented development” as the landbank is sandwiched between two upcoming MRT Line 1 stops in Sg Buloh. Hence, it is highly likely that MRCB could win a big slice of the project given its successful transit-oriented development in KL Sentral. This could significantly replenish MRCB’s landbank after most of its KL Sentral landbank will be depleted in 2015-2016. Assuming MRCB secured 20% of the RM50b GDV, we estimate our SOP-derived valuation to add another 21 sen to RM2.22/share. We expect more Kwasa Damansara-related news to continue to flow in coming months, which should help support the stock.

Upgrade to OUTPERFORM. After re-visiting our SOP-derived valuation, we have upgraded MRCB to OUTPERFORM with higher Target Price of RM2.01 from RM1.40 previously. Our revised valuation is after the following revisions/updates:

(i) Increasing the 30%-stake in DUKE highway’s valuation to RM197m from RM43m to reflect the latest valuation of the highway from an independent valuer, BDO, that was appointed by EKOVEST (NR) in October 2013.

(ii) Revising its property investment valuation to RM1.7b from less than RM1.0b as we had underestimated its value previously.

(iii) Expanding fwd-PE multiples for its construction division to 10x from 7x premised on the expectation of higher chances to meet the orderbook replenishment target of RM1.0b this year. In fact, fwd-PER of 10x is still 29% lower than average construction stock’s fwd PER of about 14x

Source: Kenanga