News  Yesterday, MRCB entered into a share swap agreement with DMIA (M) Sdn Bhd (DMIA) for the remaining 30% equity interest in Country Annexe Sdn Bhd (CASB) with the transfer of MRCB’s 100% equity interest in Lotus Terrain Sdn Bhd (LTSB) to DMIA.

 At the same time, MRCB also disposed its 70.0% stake in Paradigma Berkat Sdn Bhd (PBSB) to DMIA for a consideration of RM39.0m. (Kindly refer overleaf for further details).

Comments  We are positive with this share swap deal, as by giving up its entire stake in LTSB that was awarded the letter of intent to construct the double tracking of railway lines in Klang Valley, specifically in the sector between Rawang and Salak Selatan (Phase 1) and the sector between Salak Selatan - Seremban – SPK Pelabuhan Kelang (Phase 2) namely the KVDT project, they are able to have full ownership in CASB, thus allowing them to have full control of its development for Lot 349 in Brickfields. This move also highlighted management’s commitment in moving away from construction sector to focus on property development, which is part of their transformation plan.

 As for the disposal of its 70.0% stake in PBSB for RM39.0m, MRCB is expecting to conclude the deal by 4Q15, which we believe is positive for the group as it would provide additional cash flow to the company and lowering its net gearing to 1.50x from 1.52x as of FY14.

Outlook  MRBC has a balance external construction orderbook of c.RM1.1b, coupled with c.RM1.7b property unbilled sales providing the group at least two years of earnings visibility.

 While management is still targeting a net gearing level of 1.3x for FY15, we reckon that a cash call is imminent, as the group will be required to make payment soon for its 70.0% equity interest in the Special Purpose Vehicle with Kwasa Land for the development of project MX-1 amounting to RM816.6m.

Forecast  We bumped up our FY15E net profit by 47.0% to RM91.4m after factoring in the gains from the sale on PBSB but our core net profit of RM62.1m remains unchanged as we regard the disposal as one-off. No changes to our FY16 earnings forecasts.

Rating Maintain UNDERPERFORM

Valuation  We continue to maintain UNDERPERFORM on MRCB given its high net gearings of 1.52x in a challenging property environment. Our Target Price of RM1.27 remains unchanged based on SoP after factoring in the consolidation of its stake in Lot 349 as the impact from the consolidation is minimal.

Risks to Our Call  Stronger-than-expected property sales.

 Lower-than-expected sales and administrative costs. 

Source: Kenanga