MRCB announced that its 51%-owned subsidiary METRO is acquiring three parcels of land in Jalan Putra measuring c.10.06 acres for a total consideration of RM335.5m from DBKL. We are long-term positive on the acquisitions due to their close vicinity to KL City Centre. No changes to FY17-18E core earnings. Maintain MARKET PERFORM with an unchanged SoP- driven Target Price of RM1.32 (cum-rights TP, RM1.65).

Surprise! Yesterday, MRCB surprised us with an announcement where their 51%-owned subsidiary i.e. Metro Spectacular Sdn Bhd (METRO) is acquiring three parcels of land measuring 10.06 acres in Jalan Putra for a total consideration of RM335.5m. While we are not certain on the exact location, we believe that they are just a throw stone away from Sunway Putra Mall given that these lands are still within the locality of Jalan Putra, Kuala Lumpur. (Kindly refer overleaf for more land details).

Cash is king! We believe that their recent corporate proposal of raising RM2.8b through rights issuance and also the divestment of its Bukit Jalil land to EPF for RM1.1b, which would turn their existing net gearing of 0.94x (as of 1Q17) to a strong net cash position gives them room to acquire these three parcels of land. After concluding the Kwasa land deal and this latest acquisition, we expect them to maintain net cash position of -0.01x. The acquisition price for the three parcels of land translates to RM765.4psf representing 27.5% premium over the last transacted price of RM600.0psf in 2014 for commercial land within Jalan Putra locality. Based on a conservative land cost to GDV ratio assumption of 20%-25%, we believe that this particular land could generate a potential GDV of between of RM1.3b and RM1.7b.

Outlook. Moving into FY17, management are maintaining their sales target at RM1.2b, banking on their planned launches of Sentral Suites (GDV: RM1.4b), 9 Seputeh Phase 2 (GDV: >RM900.0m), Bukit Rahman Putra (GDV: RM100.0m) and Bandar Sri Iskandar (GDV: RM16.0m). MRCB’s remaining external construction order-book stands at c.RM7.0b. Coupled with c.RM1.5b unbilled property sales, these numbers will provide the group with at least four years of earnings visibility.

Earnings unchanged. We make no changes to our FY17-18E numbers as we believe it would take at least another 2-3 years for projects on these three parcels of land to be launched as they are still required to reapply for a higher plot ratio from its existing plot ratio of 3.0x.

MARKET PERFORM maintained. We reiterate our MARKET PERFORM with an unchanged SoP-driven Target Price of RM1.32 (cum-rights TP, RM1.65), as we have yet to factor in any GDV replenishments into our RNAV due to the lack of details from management on the development plans for these three parcels of land. However, we deem that even if we were to input RM1.3b- RM1.7b GDV replenishment into our RNAV, the impact is immaterial to our TP of RM1.32.

Downside risks to our call include: (i) weaker-than-expected property sales, (ii) higher-than-expected administrative cost, (iii) negative real estate policies, and (iv) tighter lending environment.

Source: Kenanga Research - 16 Jun 2017