News

Yesterday, MRCB entered into a sales and purchase agreement with the Government of The Federal Republic of Germany to acquire a parcel of freehold land that is located within the immediate vicinity of KLCC (close proximity to Permodalan Nasional Bhd and Lembaga Tabung Haji towers, measuring 1.87 acres for a total consideration of RM259.2m or RM3,188 psf.

Comments

We were not surprised by the land acquisition, as management has always been actively looking for landbanks.

The land price appears to be fair, if not attractive, when compared to the land acquisition (c. 4ac) done in the adjacent road, Jalan Conlay, by KSK Group back in Dec-13 for RM3,298 psf.

While project GDV guidance was not provided, by assuming a steep RM1,700psf ASP within the vicinity, we derive an optimistic-end GDV of RM1.04b (refer overleaf), which would potentially increase their existing GDV (excluding Salak South) by another 4% to RM28.8b, which is an insignificant/muted impact to their RNAV

Based on our most optimistic GDV estimate, land cost will be 25% of GDV, which is higher than today’s norm of 10%-20%, implying that development margins could be thinner than 20%. It indicates that the land requires a longer ‘gestation’ period. While the land may not be financially viable for development in the near future, we acknowledge that such landbanking opportunity in the prime spots of KLCC is rare. For the said land’s cost to come in at only 20% of GDV, project ASPs will have to be at least RM2,100 psf based on our built-up assumptions. As of FY14, MRCB’s net gearing stood at 1.52x which is expected to ease to 1.41x. This is even after acquiring the German Embassy land for RM259.2m as we are expecting a cash inflow of RM476m from Quill Capita Trust (QCT) after the disposal of Platinum Sentral in March-15.

We are neutral on the land acquisition as there will be no near term earnings’ impact while impact to net gearing is more than compensated by the proceeds from Platinum Sentral disposal.

Outlook

MRCB 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

No changes to our earnings forecast.

Rating

Maintain UNDERPERFORM

Valuation

The new project does not have any material impact on MRCB’s SoP valuation. Hence, our Target Price of RM1.27 remains unchanged based on SoP after factoring in the potential GDV from German Embassy land. We continue to maintain UNDERPERFORM on MRCB given its high net gearings of 1.52x in a challenging property environment, while potential cash calls could cause further earnings dilutions

Risks to Our Call

Stronger-than-expected property sales.

Lower-than-expected sales and administrative costs.

Source: Kenanga Research - 8 Apr 2015