Positive on its MOU with PowerChina Construction in forming a consortium to bid for projects from PNB, as this could be a source of diversified income for MAGNA, away from solely relying on property development which has been lacklustre. No changes to FY19-20E earnings. Maintain UP with unchanged TP of RM0.740.

News. Yesterday, MAGNA announced that they have signed an MOU with PowerChina Construction to establish a consortium between to collaborate and bid for Engineering, Procurement and Construction work for one of PNB’s projects known as Phase 3 development.

A positive MOU. While there are limited details on the consortium and the above-mentioned Phase 3 development project, we believe MAGNA would control up to 51% of the consortium while PowerChina Construction holds the remaining 49%. As for the project, we reckon that it could be part of the development of Merdeka 118 as there are not many projects from PNB that have 3 phases of development. Hence, we believe that if it is part of Merdeka 118, and the potential contract value from this Phase 3 Development could range between RM0.5b to RM1.0b as the previous contract from Merdeka 118 was worth c.RM680.0m, namely the shopping mall component that was awarded to WCT TSRCAP. We are positive on the MOU as it could help MAGNA to diversify from its property development business which has been lackluster due to tough property market conditions.

Outlook. MAGNA’s focus will continue to be on clearing its existing inventory of RM254.4m at cost in Boulevard Business Park, Jalan Kuching, Desa Mentari projects. As for The View Residence at Shah Alam, the group aims to re-open booking for the project in 2H19 by offering better sales package in hopes of encouraging better response. Apart from the projects, we believe that earnings could be boosted if MAGNA successfully monetize its 2.6 acres of land along Jalan Ampang, valued at c.RM400m, of which we have not imputed into our estimates.

Earnings review. No changes to our FY19-20E earnings as we did not factor in any contract replenishments.

Maintain UNDERPERFORM with an unchanged Target Price of RM0.740. Our TP is based on property RNAV discount of 70%, which implies a 59% discount (at historical trough level) to FD SoP of RM1.79 due to the volatility in earnings as shown in recent quarterly results.

Risks to our call include: higher-than-expected margins/property sales, lower-than-expected administrative costs, changes in real estate policies, and changes in lending environment.

Source: Kenanga Research - 12 Jul 2019