Upcoming news flow on MRCB’s landbanking and construction job flow will likely excite the market. Maintin BUY, with a higher TP of MYR1.50 (from MYR1.00, 27% upside). Earnings quality will likely improve from FY16, as new and profitable construction jobs start to kick in and feeand dividend-base incomes may strengthen. We lift our FY16F-17F earnings by 22% and 40% to reflect the PDP fees for the LRT 3 project.Earnings turnaround in FY16. While Malaysian Resources Corp’s (MRCB) earnings track record has been rather volatile, we believe this will change. Earnings quality should start to improve from next year, as: i) many old low-margin construction jobs will be completed in 2015, and new and profitable ones will start contributing; ii) it may have a stronger recurring earnings base from LRT 3 project delivery partner (PDP) fees and higher dividend income from its 31%-owned MQ REIT (MQREIT MK, NEUTRAL, TP: MYR1.19) as more assets are sold; and iii) management will also emphasise on improving operating efficiencies next year as more contracts and landbank are secured.

Strengthening construction unit. We believe its contract flow will continue going into 4Q, as we understand that MRCB is one of the frontrunners for several construction jobs. Earlier, the media also reported that it could be involved in the MYR1bn refurbishment works for the National Sports Complex in Bukit Jalil. YTD, the company has won MYR643m worth of jobs vs our full-year target of MYR1bn.

One of the few developers with strategic land parcels. As a bumiputera developer, it is well-positioned to leverage on major shareholders – Employees Provident Fund (EPF) and Gapurna SB – to secure strategic land parcels, especially in the Klang Valley area with manageable funding plans. Investors should expect positive news flow on this front over the next few months.

Forecasts. We raise our FY16-17 earnings forecasts by 22% and 40% to reflect the PDP fee contribution. Key earnings risks include: i) delaysin the LRT3 project; ii) rising input costs that may result in cost overruns.Maintain BUY. Our TP rises to MYR1.50 (from MYR1.00) based on a lower 35% discount to RNAV (from 50%), as we expect better earnings visibility, while positive news flow on construction and landbanking coulddrive MRCB’s share price over the near term.

2016 – A Turnaround Year The “overhaul” takes time We recently met with Mr Ann Wan Tee (CFO), Mr Johan Aly (general manager of corporate finance) and Ms Nina Syazwani Sarif (investor relations representative) from MRCB to get a better understanding on the company’s strategy going forward .We were positive after the meeting. Since Tan Sri Mohamad Salim Bin Fateh Din was appointed as the managing director and the new management team joined MRCB in Sept 2013, while earnings in FY14-15 have yet to turn solid, management has carried out some plans to restructure the company over the last two years. The volatile earnings are understandable, as the restructuring effort usually takes a period of time before results are visible. Buying into MQ REIT via the disposal of Platinum Sentral in 2014 is part of the company’s plan to re-strategise its business structure.What should investors look for in 2016?

The “overhaul” plans will continue going into 2016, but we believe investors should be able to start seeing gradual earnings recovery. At the meantime, management will be aggressive in growing both its property development and construction divisions by securing more landbank, either via swaps, land privatisation or outright acquisitions, as well as sizeable construction contracts.

Earnings quality should improve from 2016. The key reasons are: i) a number of old and low-margin construction jobs will be completed in 2015, and new and profitable ones, which were secured over the past year, will start contributing; ii) there could be a stronger recurring earnings base from LRT 3 PDP fees and higher dividend income stream from its 31%-owned MQ REIT as more assets are disposed of, and iii) management will also emphasise on improving operating efficiencies next year, given the larger operating scale as more contracts and landbank are secured.

Strengthening the construction division We are upbeat that c.MYR488m (or about 33%) worth of construction jobs will be completed this year as these are the old construction contracts which have beenyielding low profit margins. Its current outstanding orderbook stands at MYR1.5bn (by effective stake), and we are confident that job flows will continue going into 4Q as we understand that a few sizeable upcoming construction jobs are well on the cards. This could potentially surpass our full-year orderbook replenishment assumption of MYR1bn. Earlier, the media reported that MRCB could be involved in the MYR1bn refurbishment/redevelopment job for the National Sports Complex in Bukit Jalil. This could be one of them. As more contracts are expected to be secured, we believe thecompany’s earnings visibility and, more importantly, profitability will be enhanced from FY16 onwards. Its orderbook replenishment, thus far, is in line with our expectation. MYR643m (by effective stake) worth of jobs has been secured YTD, including a MYR310m (MRCB has 51% stake) JV construction job with HicomBuilders SB to develop a new integrated immigration, customs, quarantine (ICQ) and security complex at Bukit Kayu Hitam, Kedah, as well as a MYR485m contract to build a conference centre and two hotels in Desaru.

Building up fee-based / dividend-based income stream Two sustainable streams of recurring income, which could potentially amount to MYR60m-65m pa, will support MRCB’s earnings over the medium term. These arethe PDP fees from the LRT 3 project, as well as the dividend income from its 31%-owned MQ REIT. We think MRCB being appointed as the JV PDP partner together with George Kent (50%) (GKEN MK, NR) for LRT 3 are good indications of its management’s executioncapability and industry connections. Momentum has built up after the two construction contracts were recently secured. In early September, the companyreceived the letter of appointment from Syarikat Prasarana Negara to be the PDP for this LRT 3 line that connects Bandar Utama to Johan Setia (Klang) . While details have yet to be announced, based on our discussion with management, we expect the PDP terms to be similar to the terms for the MMC-Gamuda JV when the latter was appointed by MRT Corp as the PDP partner in 2012. For MMC-Gamuda, the key terms were: i) a PDP fee of 6% of total contract value; ii) if the actual project cost exceeds the target cost by up to 15%, the PDP fee will be reduced in accordance to an agreed formula; iii) the PDP will have to shoulder the balance if the actual project cost exceeds the target cost by 15%; and iv) the PDP is liable to a liquidated and ascertained damage (LAD) for late delivery of MYR500k per day.

Therefore, given the LRT 3 contract value of about MYR9bn, the 6% fee at 50% stake would translate into an annual fee of about MYR50m over the next five years (2016-2020), but actual revenue recognition will likely be according to the construction progress. These fees are almost an immediate earnings enhancement as the associated cost to the PDP role is very minimal.Another stream of recurring income for MRCB is via its associate MQ REIT. MRCB emerged as MQ REIT’s (formally known as Quill Capita Trust) major shareholderafter selling Platinum Sentral into the REIT in 2014. We believe this is a strategic move, as MQ REIT will provide a long-term platform for MRCB to recycle its investment properties so that the latter can unlock the value of its assets and raise cash for working capital from time to time. Furthermore, MQ REIT has positioned itself as a commercial office REIT and this suits MRCB as a “sponsor”, given that it specialises in office developments. At this juncture, we estimate that MQ REIT could offer about MYR16m dividend income to MRCB, and we believe this amount could increase as more assets are injected from MRCB in future. A total of MYR1.2bn (MYR1.7bn if Celcom Tower is included) worth of investment properties are available for sale, and among them, Shell Tower andAscott Residences have been identified to be the next to be disposed of. These assets are potentially worth MYR900m. Given the deal structure for Platinum Sentral, we reasonably believe that MRCB will likely accept partial REIT units and cash as settlement for future asset injection. Its dividend stream will, therefore, be bumped up. Over a longer term, given that MRCB will also develop several retail malls (in Kwasa Sentral, PJ Sentral and Penang Sentral), a retail REIT could be set up to be another vehicle for MRCB to monetise its assets.

Strategic landbanking effort to make property development attractive MRCB is one of the few rare bumiputera entrepreneur-run listed property companies. The backing of its major shareholders – EPF and Gapurna – is an added advantage when it comes to government-private sector land privatisations. We believe the upcoming redevelopment of the stadium and sport complex in Bukit Jalil, as mentioned by the media, will be one of the examples. According to the news article,besides getting the redevelopment/refurbishment job, MRCB, in return, would get land parcels in the vicinity of the stadium for development. While further details were not reported, based on MYR1bn contract value, we estimate that the land size could be above 50 acres. If the news is true, this would be an exciting deal for MRCB, as strategic land parcels in Bukit Jalil are hard to come by, and the availability of landthere is very limited. The potential GDV from the land could also be quite sizeable. The area is now a new hotspot within the Klang Valley, given the new LRT station,

which will be completed soon, Lai Meng primary school, and a few other education institutions, as well as the existing road accessibility. N ew property developmentproject, which includes a regional retail mall, by Malton (MALT MK, NR) have been well-received when it was launched in 2Q.While the Bukit Jalil deal is still uncertain for now, we like MRCB’s existing landbank profile. The company is not exposed to the Iskandar region, which currently is seeing poor demand and is in a supply glut, and its key landbank are mostly located in the prime Klang Valley and Penang areas. These include Penang Sentral and PJ Sentral, which provide the company opportunities to replicate the success of KL Sentral elsewhere. Thus far, the development of PJ Sentral is on track, and MRCB has managed to sell and lease four office towers. It is left with two more towers to be built. Meanwhile, construction works at Penang Sentral, Butterworth has started, and the transport terminal (for bus, train, ferry and taxi) wll be built first. With a proper transport hub in place, we will likely see a positive spillover to the real estate in the surrounding areas, a trend similar to the KL Sentral area over the past 7-8 years.

Earnings forecast and financial position We raise our FY16-17 earnings forecasts by 22% and 40% respectively to factor in the PDP fee contribution. Interest expense could possibly be marginally lower, as the debt associated with the Eastern Dispersal Link (EDL) of about MYR1.2bn will likely be refinanced at a slightly lower rate. However, new debt could be raised to help fund some of the construction jobs, especially the Bukit Jalil redevelopment works (if it materialises) as MRCB may be receiving payment in kind (land parcels) instead of a cash settlement. Hence, its net gearing could still hover at around 1.2x-1.5x going forward. Given its stretched balance sheet position, we do not rule out the possibility of an equity call, as more land deals and construction jobs come through.

Valuations We maintain our BUY rating on MRCB. Our TP increases MYR1.50 from MYR1.00,based on a 35% discount to our revised RNAV estimate after we update our RNAV with the latest landbank data. Admittedly, the property sector outlook remains rather challenging. However, we believe investors should look forward to MRCB’s strong news flow on construction job flows and landbanking going forward that could potentially trigger a re-rating of the stock. Another angle that investors may have overlooked is the valuable landbank portfolio, given MRCB’s strategic position in Penang and Klang Valley via its Penang Sentral, PJ Sentral and KL Sentral projects, which not many developers would have the competitive edge to secure. Such prime landbank is important and would directly benefit MRCB once the property sector recovers.