Yesterday, MRCB and its consortium partner won the LOI from MyHSR for HSR PDP role, which we were pleasantly surprised. No changes to FY18-19E earnings. Maintain OUTPERFORM with a higher SoP-driven Target Price of RM1.15 (previously, RM1.10).

News. Yesterday, MRCB announced that they and their consortium partner GAMUDA were awarded a Letter of Intent (“LOI”) by MyHSR Co (“MyHSR”) to undertake the role of a Project-Delivery-Partner (“PDP”) for the KL-SG High Speed Rail (“HSR”).

Pleasant surprise! Despite having mentioned in our strategy that we are expecting news flow from HSR in the near term, we were still pleasantly surprised with GAMUDA-MRCB’s (50:50) win on the PDP for HSR as we believed that all consortiums stood a good chance in winning the role. However, we did not anticipate MyHSR to appoint two PDP for a single project, as YTL-THP joint venture was appointed PDP Package 2 for the Southern region. While there is no indication of project value for HSR, we believe that it should range closer to c.RM45.0b based on the recent high-speed rail project approved in Thailand costing approximately USD7.2b or c.USD33.0m/km. Based on a simple ratio of 4 out of 7 stations in the Northern region, we assume that GAMUDA-MRCB’s portion to be worth c.RM26.0b while YTL-THP’s to be c.RM19.0b, and its PDP fees to be 6% or potentially lower.

Outlook. In the mid-to-near term, MRCB’s remaining external construction order-book stands at c.RM5.2b, and coupled with c.RM1.7b unbilled property sales, these numbers will provide the group at least four years of earnings visibility. Going forward, management are looking for more land banking opportunities and sales target of RM1.0b for FY18 backed by its previous launches, i.e. Sentral Residences and 9 Seputeh. Construction and property division aside, management remains hopeful to dispose EDL highway in FY18.

FY18-19E earnings maintained. Despite the appointment of PDP role, we make no changes to our FY18-19E earnings, as we believe that the contribution from HSR will only kick in earliest from FY20 as we are expecting the tenders for construction works to be called in 2HCY19.

OUTPERFORM maintained. Reiterate OUTPERFORM on the stock with a higher Target Price of RM1.15 (from RM1.10) after factoring in HSR PDP into our valuation after deriving its NPV, which we have conservatively assumed 5% PDP fees on the back of project value of RM26.0b with a WACC rate of 10%. Going forward, we remain positive with MRCB’s prospect of 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 - 06 Apr 2018