MRCB announced the disposal of its Jalan Kia Peng land to MRT Co. for RM180.0m. We are positive as it will eliminate all the potential risks, i.e. cost escalation for planned development and buyers’ sentiment due to heavy construction activities in that area. We raised FY16E CNP by 12%, but no changes to FY17E CNP. Maintain MARKET PERFORM based on unchanged SoP-driven TP of RM1.33.

Paving way for MRT2. Yesterday, MRCB announced that they are disposing their parcel of land along Jalan Kia Peng measuring 1.0 ac that is meant for the development of a service apartment with an estimated GDV of RM400.0m for a total consideration of RM180.0m to MRT Co. to make way for the construction works of MRT2.

Surprise, surprise! While management did indicate the consideration for the sale of the land to MRT Co, it is still a positive surprise to us given the transacted price of RM180.0m which translates to RM4.1k psf which is the highest as compared to previously transacted prices that ranges between RM3.1k-RM3.6k in the surrounding area. However, we believe the price is fair for MRCB due to the initial construction works already done for its development project namely The Grid.

Positive move. We view that management made the right decision to dispose the land to MRT Co. despite having to bear the opportunity loss to develop the land. We believe it would be a tough selling environment as the weak buyers’ sentiment would be further affected by MRT2 construction works, coupled with potential cost escalations, especially when MRT2 line crosses right below its land. That said, it also fits well into their divestment plans as the sale could immediately lighten up their balance sheet from 1.08x (1H16) to 1.01x.

Upgrade in earnings. We are upgrading our FY16E earnings by 12% to RM140.3m after we factored the gain of disposal from the land amounting to RM38.1m. However, we are keeping our FY17E core earnings unchanged.

Outlook. Management is expecting FY16 sales of RM1.0b from launches at Sentral Suites (GDV: RM1.4b), Bukit Rahman Putra (GDV: RM415m) and Bandar Sri Iskandar (GDV: RM43m) towards 2H16. However, we are expecting sales of RM600m in FY16 as launches are mostly in 2H16 and given the weak property market, we would not be surprised if the group scales back launches. MRCB’s remaining external construction order book is at c.RM6.6b, coupled with c.RM1.3b unbilled property sales providing the group with at least four years of earnings visibility.

Maintain Market Perform. We reaffirm our MARKET PERFORM call with an unchanged SoP-driven Target Price of RM1.33, as we believe that the main catalyst for MRCB still lies on the disposal of EDL highway, which would drive the group to greater profitability arising from interest cost savings.

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 - 18 Nov 2016