MRCB’s wholly owned subsidiary, MRCB Builders entered into a project delivery partner (PDP) agreement with Kwasa Land Sdn Bhd (KLSB) for the construction of infrastructure at Kwasa Damansara for a provisional fee of RM112.3m. We believe this is a longer-term positive for MRCB as it provides earnings contribution once the project begins construction, likely by FY18. As such we make no changes to FY16-17E earnings. Maintain MARKET PERFORM with an unchanged TP of RM1.39.

PDP for Kwasa Damansara. Malaysian Resources Corp Bhd’s (MRCB) wholly owned subsidiary, MRCB Builders entered into a PDP agreement yesterday with Kwasa Land Sdn Bhd (KLSB) for the construction and completion of common infrastructure for Majlis Perbandaran Petaling Jaya (MBPJ) at Kwasa Damansara Township, Sungai Buloh (2330.4ac) for a provisional fee of RM112.3m, or 5% of the development cost of RM2.3b, excluding GST and reimbursable cost.

Part of longer-term plans. We were not surprised as management had indicated that they are keen on pursuing fee-based structure projects via PDP. We are positive on the announcement as the PDP structure accretes directly to the group’s bottomline, without incurring additional cost or straining the balance sheet. Additionally, a project of this size (RM50b GDV) would enhance MRCB’s exposure to large scale construction projects. This agreement provides positive earnings contribution in the longer run once construction of Kwasa Damansara is underway, likely by FY18. This PDP role could easily add RM22.5m of PDP fees p.a., assuming the project is spread across 5 years once construction commences.

We make no changes to our FY16-17E earnings of RM38.4-65.3m at this juncture as: (i) the project is likely to only accrete positively to earnings from FY18 onwards, dependent solely on the timeline of Kwasa Damansara Project by MBPJ, while the approved timeframe of the project is yet to be fixed and may be revised throughout the progress of the project.

Outlook. At this juncture, the PDP Agreement is pending approval from MRCB’s shareholders within 9 months. Should approvals be obtained, the PDP agreement is expected to be unconditional by 4Q16. Currently, MRCB’s remaining external construction orderbook is at c.RM3.2b, coupled with c.RM1.6b unbilled property sales providing the group with at least two years of earnings visibility.

Reiterate MARKET PERFORM and TP of RM1.39 based on FY16E NTA/share of RM1.10 and a Forward P/NTA of 1.26x which is -1SD to the average 6-year historical mean. We apply a below average Fwd. P/NTA due to weakening sentiment on the stock arising from: (i) softer property segment, (ii) dilution of existing shareholdings from the placement, and (iii) RAM’s downgrade of the Southern Link’s junior sukuk, while positives arising from the construction segment are mostly within expectations at this juncture. Due to its compelling turnaround plans, we maintain our valuations, although earnings may be weak in the near-term. Downside risks to our call include; (i) weaker than expected property sales, (ii) lower than expected sales and administrative cost, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 27 May 2016