We came back from MRCB’s analyst briefing yesterday feeling more reassured after gaining clarity on the Group’s financing plans for the recent corporate exercise and its future direction. Its recent landbanking ambition and construction contracts with payment-in-kind consideration had us concerned over its cashflow and balance sheet. However, management is exploring the option of developing and landbanking on a multi-party JV structure to avoid over-taxing MRCB’s balance sheet. Furthermore, the cash outflows for Bukit Jalil and Cyberjaya City Centre projects are spread out over a longer period compared to our initial expectations. More importantly, the group is exploring non-cash call options to alleviate balance sheet stress whilst allowing for future expansions. We maintain MARKET PERFORM but increase Target Price to RM1.63 (from RM1.10) as the group’s turnaround efforts look promising and will enhance investors’ sentiment on the stock.

Exploring non-cash call financing options. We were glad to hear that management is exploring non-cash call options to fund its recent ventures and future landbanking plans. Management made it clear that MRCB needs to grow its landbanks to sustain longer term development plans for the group. To recap, during the recent string of corporate announcements (dated 28th October 2015), we had initially estimated that the Group would have to fork out a total of RM1.65b for Cyberjaya mixed development (RM0.3b), Bukit Jalil privatization agreement (RM1.3b), and another RM1.0b for the acquisition of Kwasa Damansara (RM0.7b) and the German Embassy Land (RM0.3b), which would potentially increase its gearing to 2.27x (from 1.12x in 2Q15). Management is exploring the following: (i) developing and landbanking on a multi-party JV structure to avoid overtaxing MRCB’s balance sheet, (ii) better cashflow management as Bukit Jalil land swap will occur in stages, i.e. MRCB will receive land worth RM499m (Project 1) after completion of construction works of similar value (by Aug-17), instead of taking on the entire RM1.6b construction cost upfront, (iii) for the Cyberjaya City Centre (CCC) project, MRCB will fork out RM269.5m no earlier than Oct-16 until certain statutory items are satisfied (i.e. plot ratios), and (iv) Kwasa Utama C8 is a fee and turnkey development and will not require cash outflow as management will obtain management fees on the provisional sum of RM3.1b. Therefore, based on (ii), (iii) and (iv), FY16E cashflow commitments will result in its net gearing increasing to 1.89x (vs. 2.27x initially) from our current estimates of 1.42x in FY16E; we will impute this impact in our estimates once the deal has been concluded. However, net gearing could be lower if the group can achieve (i).

Focusing on commercial urbanised development. As we had highlighted in our previous report (dated 29th October 2015), MRCB is on a replenishment mode and is targeting urban and commercial developments. MRCB has done well with this business model in the past (ex: KL Sentral development) as the Group is able to cater for tenant specific customizations. Additionally, we like the fact that MRCB already has off-takers for its developments even before commencement as proven by its strong take-up and occupancy rates. Additionally, MRCB will continue to realize the value of their investment properties via the Group’s REIT vehicle (MRCB-Quill REIT) or sale to third parties, which will further alleviate balance sheet stress. Currently, the group has nine buildings with a total investment value of RM1.6b. The group’s last disposal was back in Jan 2014 (Platinum Sentral) and we believe there will be more to come.

Turning more positive for the long-term. We were also guided that c. 55% of borrowings are related to the Easter Dispersal Link Expressway (EDL), implying that the company can easily de-gear its property-related part of the balance sheet upon sale of more investment properties. We have yet to impute for any of such disposals as timing is uncertain. While we are glad that the group is considering non-cash call options, we note that it will take a while to realize these plans while earnings accretions from the recent ventures will take a while to materialize. However, we view this as a step in the right direction as we can see the group’s efforts to sweat its assets more efficiently, be more focused on its core businesses and an active capital management plan to alleviate balance sheet stress. Going forward, we believe more clarity on the company’s future plans and direction will bode well for share price sentiment.

Maintain MARKET PERFORM (previously UNDER REVIEW) but increase Target Price to RM1.63 (from RM1.10). Our higher TP is based on the average 6-year historical mean Fwd P/NTA of 1.73x on FY16E NTA/share of RM0.94 (from -2SD historical mean Fwd P/NTA). We are pegging the valuation to average level on the group’s turnaround efforts which is expected to further improve investors’ sentiment as their plans unfold. No changes to our FY15-16E earnings as the orderbook replenishment of RM1.6b and RM3.1b which is staggered over 12 years are still within our FY15-16E replenishment assumptions of RM1.0b-RM1.8b. 

Source: Kenanga Research - 13 Nov 2015