We are neutral on the news regarding the termination and settlement agreement of EDL amounting to RM1.3b which transpired per our expectation. However, the conclusion of the deal is long-term positive for MRCB as it further lightens its balance sheet, bringing down net gearing to 0.44x from 0.70x (2Q18). No changes to earnings.Maintain MP with an unchanged TP of RM0.800.

News. Yesterday, MRCB announced that they have entered into a termination and settlement agreement with the Government of Malaysia regarding their concession agreement on Eastern Dispersal Link highway (“EDL”) for a total consideration of RM1.3b. The termination agreement is effective from 1st January 2018.

A long-term positive. We are neutral as we have been expecting the EDL deal to conclude this year. However, we are relieved as the long delayed termination and settlement (due to various reasons) had finally concluded despite the change of government. The settlement agreement of RM1.3b would be a long-term positive for MRCB, as the funds could be used to settle a huge chunk of its debt, which will further lighten its balance sheet bringing net gearing to 0.44x from 0.70x (2Q18).

Outlook. In the mid-to-near-term, we believe that MRCB will focus on the execution of their remaining external construction order-book that stands at c.RM5.1b; coupled with c.RM1.7b of unbilled property sales, these numbers will provide the group 3-4 years of earnings visibility. For now, we are keeping sales target of RM1.0b for FY18 backed by its previous launches, i.e. Sentral Residences and 9 Seputeh, as we expect property sales to pick up in 2H18 and we expect to see a ramp- up in marketing activities as well. However, should the group fail to achieve at least 65% of our full-year target by 3Q18, we will look to trim our estimates.

Earnings review. No changes to our FY18-19E earnings as we have factored in the interest cost savings arising from the settlement agreement. To recap, previously EDL had not been profitable since operations and it was a main drag to their earnings in the past.

Maintain MARKET PERFORM. We maintain MARKET PERFORM, with an unchanged Target Price of RM0.800 as we have already factored the settlement of EDL into our SoP valuation. Our TP implies 0.8x PBV on FY18E BV/share of RM1.01, which is trading close to trough levels.

Downside risks 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 - 13 Nov 2018