INVESTMENT HIGHLIGHTS

• Agreement entered for the supply of chilled water

• Contract to run for 25 years, with a value worth RM150m

• MRCB’s track record will mitigate risks on the downside

• Positive on the news, adding to the group’s strong fundamentals

• Reiterate BUY call with an unchanged TP of RM1.02

MRCB’s subsidiary, KD District Cooling System Sdn Bhd (“KDDCS”) has entered into a Chilled Water Supply Agreement (“CWSA”) with Kwasa Utama (“KUSB”). KUSB is a wholly owned subsidiary of Employees Provident Fund. The job awarded entails the supply of chilled water to an office building located at Kwasa Damansara, Shah Alam. The contract which runs for 25 years is worth RM150m to MRCB.

Track record of six years. MRCB has the expertise in providing chilled water supply since 2013. KDDCS was formerly set up under the group, for the proposed provision of chilled water supply. The supply agreement signed with KUSB, requires the delivery of chilled water beginning 1 September 2020.

Positive on the news. We view the impact on MRCB is positive, consequent to the long-term commitment agreed with KUSB. We understand that the contract value is derived after taking into account the proposed revision in tariff over the tenure of the term. By extension, revision over the past ten year had averaged at 6.75% in every three years.

Long-term earnings seen well supported. Adding the new job value of RM150m to the group’s outstanding orderbook (as of 1QFY19), we arrive at total value of RM21.6b. In a broader sense, the group remains on sound footing given its long-term visibility. Outlook on a shorter term is turning better, whereby the progress work on projects namely LRT3 will see its earnings to be recognized in 2H19 due to retiming issue. Notwithstanding that, we believe a greater emphasis should be addressed on its long-term prospect moving forward.

Change in earnings. We do not change our FY19F and FY20F estimates. We believe earnings impact is only notable beginning FY21, succeeding the commercial operation date on September 1, 2020. Accordingly, contribution from this contract will likely raise its bottom-line by a minimal quantum annually.

Recommendation. LRT3’s billing is expected to pick up in 2HFY19. On that account, a bigger income flow from that period would potentially offset the retiming downside in 1HFY19. As of 1QFY19, its gearing stood at 0.23x vs 0.58x , leaving the group headroom to leverage on a bigger-scale project. Adding into that, the group’s robust orderbook and healthy balance sheet are expected to firm up support for value accretion prospectively. The return of previously shelved projects namely Bandar Malaysia and East Coast Rail Link is an encouraging development, whereby MRCB could emerge as potential beneficiary. We maintain our BUY call with an unchanged TP of RM1.02.

Source: MIDF Research - 5 Aug 2019