MRCB will acquire GKENT’s 50% stake in MRCB-GK Sdn Bhd for RM53m – effectively making MRCB the sole main contractor overseeing the entire LRT3 project. We are positive as (i) the price tag is a bargain with potential value accretion of RM52m in the next three years, (ii) contract profitability can be improved through cost reductions, and (iii) MRCB’s effective outstanding order-book will increase by RM2.4b to RM6.8b. FY22E earnings adjusted +61% to RM49m after imputing profits from the 50% stake in MRCB GK Sdn Bhd. Maintain MP with a higher SoP-TP of RM0.405 (from RM0.395).

MRCB acquires GKENT’s entire stake in LRT3. MRCB announced that it will be acquiring GKENT’s 50% stake in MRCB-GK Sdn Bhd for RM53m. To recap, MRCB-GK Sdn Bhd is currently the main contractor overseeing the LRT3 fixed price contract worth RM11.3b. Consequent to the acquisition, MRCB will now be the sole main contractor overseeing the entire LRT3 project and MRCB-GK Sdn Bhd will become a subsidiary (previously JV). The stake sale is expected to be completed by 4QFY21.

Price is at a bargain. Based on MRCB-GK Sdn Bhd’s latest 1HFY21 net assets of RM114.4m (50% stake being RM57.2m), we believe the RM53m price paid by MRCB is a bargain given that MRCB-GK Sdn Bhd still has future profits yet to be recognised which would enhance its existing book value. Based on our calculations (table overleaf), we believe the LRT3 project (which is at 58% progress as of 1HFY21) could contribute another RM95.5m in profits to MRCB-GK Sdn Bhd and increase its total book value to RM210m by 2024 upon project completion. Therefore, against the purchase price of RM53m, there is potential value accretion of c.RM52m for the 50% stake in the next three years. In other words, MRCB is paying only c.0.5x PBV for this stake. However, do note that there are risks attached to MRCB-GK Sdn Bhd’s future profitability as non-performance by the subcontractors could erode profitability should remedial works need to be provided.

There is room to reduce costs. Post-acquisition, we believe MRCB GK Sdn Bhd’s profitability can also be improved through the reduction of overheads and staff costs as previous duplication of resources at the JV level can now be eliminated and resources can be shared with its parent company i.e. MRCB. Future finance costs can also be reduced as rates obtainable by MRCB is c.4.5% (versus c.7.0% rate at the JV level previously). That said, there are currently no borrowings in MRCB GK Sdn Bhd.

Post-acquisition, MRCB’s effective outstanding order-book* will increase by RM2.4b to RM6.8b (from RM4.4b). Overall, we are positive on the acquisition.

*We derive effective outstanding order-book by deducting idling projects i.e. Bukit Jalil Sentral related contracts worth RM11b, and FINAS project worth RM0.2b which is an internal job.

Increase FY22E earnings by 61% to RM49m after consolidating MRCB-GK Sdn Bhd’s 50% stake. Maintain MP on higher TP of RM0.405 (from RM0.395) after imputing the value accretion of c.RM52m derived from the 50% stake acquisition.

Source: Kenanga Research - 29 Sept 2021