Yesterday, MRCB fixed its rights issue price at RM0.79 and bagged a new contract amounting to RM58.9m to construct a stadium in Larkin. Following the price fixing, we raised our FY18E earning by 49% after factoring in the potential interest savings from the rights issuance exercise. While we are maintaining our OUTPERFORM call on MRCB, we also lowered our SoP-driven TP to RM1.14 from RM1.23 given that the amount raised from the rights issuance is lower than our earlier expectation.

Price fixed? Yesterday, MRCB announced that the issue price for the rights shares has been fixed at RM0.79 per rights share. The issue price of RM0.79 represents a 20.2% discount to its theoretical ex-all price of RM0.99. Based on the issue price of RM0.79, MRCB is looking to raise RM2.25b from the exercise instead of RM2.85b from its earlier proposed/illustrative issue price of RM1.00 due to weak market conditions. The exercise will bring down its existing net gearing of 0.99x (as of 2Q17) to 0.24x.

Secures Larkin stadium job? On a separate announcement, MRCB also announced that they have secured a stadium job in Larkin for a total consideration of RM58.9m. The construction work for the stadium would take up to 18 months from the award date and we are neutral on the contract award win as it is within our order-book replenishment assumption of RM1.0b. To-date, MRCB has won RM467.9m worth of jobs, making up 47% of our order-book replenishment of RM1.0b. Apart from the Larkin stadium job, they also announced the contract win for MRT2 station works (package S210) totalling to RM145.8m which have no impact to our FY17-18E earnings as we have already factored this in our estimates given that work package S210 is part of package V210 worth RM648.0m that they secured last year.

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 at least four years of earnings visibility.

Raising FY18E earnings. Following the announcement of its price fixing, we raised our FY18E core earnings by 49% after factoring in the potential interest savings from the proceeds of the entire rights issuance exercise, while keeping our FY17E earnings unchanged.

OUTPERFORM maintained. Nonetheless, we are maintaining our OUTPERFORM call on MRCB but with a lower SoP-driven Target Price of RM1.14 (cum-rights TP, RM1.48) from our previous TP of RM1.23 after factoring in a lower rights issue price of RM0.79 as compared to our previous assumption of RM1.00. We are positive with the rights issuance exercise as it brings MRCB back into a better financial footing coupled with the potential sale of EDL highway which would be an upcoming catalyst for the stock.

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 - 20 Sep 2017