It was reported that Malaysia is looking to drop the KL-SG HSR project. It is a negative surprise for MRCB and its consortium partner GAMUDA, as they will no longer have the PDP role for the project. No changes to FY18-19E earnings. Maintain OUTPERFORM with a lower SoP-driven Target Price of RM0.900 (previously, RM1.15).

News. It was reported by various media that the Prime Minister of the newly formed government of Malaysia, Tun Dr Mahathir Mohamad, indicated that Malaysia is dropping the plan for a high-speed rail link between Kuala Lumpur and Singapore.

Negative surprise to MRCB and GAMUDA, as this decision will cause them to lose their PDP role. To recap, the PDP role was awarded to GAMUDA and MRCB back in 5th April 2018, which we anticipate c.RM26.0b worth of works for their portion in the Northern region. However, we believe that the government’s swift decision may be a blessing in disguise for GAMUDA and MRCB as minimal work/cost been incurred for the project as it is still at preliminary stage.

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 is 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 its EDL highway in FY18.

Estimates unchanged. Despite the news of cancellation of HSR, we make no changes to our FY18-19E earnings, as we have yet factored it into our FY18-19E earnings given that we had been expecting the construction works to only kick off in 2020.

OUTPERFORM maintained. Reiterate OUTPERFORM on the stock with a lower Target Price of RM0.900 (from RM1.15) after removing HSR PDP from our valuation and widen our property RNAV discount to 68% inline with sector average (previously, 50%), which we had previously assumed 5% PDP fees on the back of project value of RM26.0b. Nonetheless, we remain positive with MRCB’s prospect of the potential sale of EDL highway, which would be a catalyst for the stock. Our TP implies FY18E PBV of 0.9x which is right above its through level of 0.7x since 2009, and we believe that it is justified given its improving earnings and the potential disposal of EDL highway.

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 - 30 May 2018