News  Yesterday, MRCB finally announced the details for the development of the Project MX-1 land measuring 64 acres that was awarded by Kwasa Land back in 30th June 2014. With an estimated GDV of RM8.0b, MRCB is required to subscribe for 70% equity interest in Kwasa Development (2) Sdn Bhd (KDSB) for a total sum of RM816.6m.

Comments  Project MX-1 in Sungai Buloh is earmarked for mixed development with 60% commercial content and 40% residential content and an approved plot ratio of up to 3.5x with an estimated GDV of RM8.0b. Based on our 70% utilisation rate assumption on the 64 acres land, MRCB would need to price Project MX-1 at a range of between RM1,000 to RM1,200psf, which we believe is still achievable given the 60% commercial content in the development.

 However, the total land cost for Project MX-1 of RM1.0b is considered fair, making up 15% (within the current landbanking cost ratio of 10%-15%) of the estimated RM8.0b GDV.

 That aside, MRCB is not required to make fullpayment of RM816.6m for the 70% equity stake in KDSB but only 10% of the total sum amounting to RM81.6m (as advance payment upon execution of shareholders’ agreement), while the 90% balance of the payment amounting to RM735.0m would be paid over the entire development period of Project MX-1. We believe that is the positive structure for MRCB as it would not further stretch its balance sheet which is already at a net gearing of 1.7x as of 1Q14.

Outlook  Over the months, MRCB had been progressing well with divestment activities and shifting its focus to property development division from construction division. Hence, we would expect its earnings to improve over the next few quarters underpinned by property projects.

Forecast  No changes to our FY14-15E earnings forecasts as we only anticipate the project to take off beyond FY15 onwards.

Rating Maintain OUTPERFORM

Valuation  Following this announcement, we raised our SoPdriven Target Price by 8% to RM2.48 (previously RM2.29) as we factor in the details of Project MX-1 into our SoP-driven valuation and we maintain our OUTPERFORM call on MRCB given that it is on track with its turnaround plans.

Risks to Our Call  MRCB’s inability to meet its minimum profit after tax guarantee of RM2.0b over the development period of 15 years. (Kindly refer overleaf for more details).

 Lower-than-expected orderbook replenishments.

Source: Kenanga