Macquarie Equities Research (MQ Research) released a report on Malaysian Resources Corporation (MRCB) today, having met MRCB’s management for clarity on the utilisation of the RM5bn sukuk program launched last month. MQ Research believes management is gearing up for a potentially stronger project pipeline; target price raised to RM0.700.

MRCB shares closed at RM0.510 yesterday. Bullish investors may consider call warrant MRCB-C64.

Event

• MQ Research upgrades MRCB to Outperform from Neutral, with a 40% upward revision in target price (TP) to RM0.70 (27x fwd-price to earnings (PE)), from RM0.50 previously. MQ Research met management to obtain a clearer understanding on the utilisation of the RM5bn sukuk program, launched by management last month. In sum, MQ Research believes management is gearing up for a potentially stronger project pipeline while taking advantage of the prevailing low interest rate environment. As such, MQ Research revises MRCB’s three-year orderbook replenishment target from RM3bn to RM10bn.

Impact

• Weak FY20E earnings per share (EPS) is a given, senior management took a >20% pay cut. Management guided that 2Q20E earnings will be hampered by a lack of construction activities in both property and construction divisions. This will also be exacerbated by its inability to continue the handover of 1060 Carnegie in Melbourne, due to the lockdown. Senior management had also taken a substantial pay cut in ensuring MRCB’s sustainability should it book zero revenue over the next 12 months.
• Waste-to-energy (WTE) back on track. MQ Research understands that the WTE project in the Central region has been revived by the federal government and MQ Research believes MRCB is in good stead to secure the role as the builder and concessionaire of the project. Depending on the capacity, the project could be valued between RM2-3bn – and this could well be supported by MRCB’s recent RM5bn sukuk program. Based on the previous plans, the government was looking to build another WTE plant in Johor Bahru to cater to the Southern region – this could well be MRCB’s next stage of growth, going ahead.
• Securing political mandate trumps pump-priming. Having gone through rigorous cost-cutting measures in the LRT3 project post-GE14, management believes that it would be imperative for the political parties to secure a mandate before awarding any projects as this would eliminate any doubts of termination and cost-cutting measures as seen previously.

Earnings and Target Price Revision

• MQ Research revises FY20-22E by -50%, +36%, +43%, respectively. MQ Research raises its TP 39% from RM0.50 to RM0.70.

Price Catalyst

• 12-month price target: RM0.70 based on a Sum of Parts methodology.
• Catalyst: Potential WTE contract and pump-priming post-GE.

Action and Recommendation

• Upgrade to Outperform (from Neutral).

12-month Target Price Methodology

• MRC MK: RM0.70 based on a Sum of Parts methodology

Source: Macquarie Research - 10 Jul 2020