• U/G to BUY from Neutral, new MYR0.44 TP from MYR0.38, 22% upside. Malaysian Resources’ 1Q22 core earnings of MYR14m comprised 48% and 40% of our and Street full-year estimates, amid larger-than-expected contributions from Light Rapid Transit 3 (LRT3). Our upgrade stems from its better job replenishment prospects – from Mass Rapid Transit 3 (MRT3) and waste-to-energy projects – as jobs are expected to flow through. As c.45% of its on-going projects are in advanced phases, the fluctuation in raw material prices should not affect its numbers greatly.

• Results review. The stellar growth in its 1Q22 earnings was on the back of overall revenue, which expanded by >100% YoY to MYR810.1m. This was mainly due to the consolidation of the LRT3 project company, Setia Utama LRT3 (SULSB), which took MRC’s ownership to 100% and allowed the group to recognise 100% of the earnings from the project. On further scrutiny, LRT3 contributed PBT of MYR33.5m in 1Q22, compared to MYR5.9m in aggregate on an equity accounting basis in 1Q21 (when it was only 50%-owned). Meanwhile, MRCB’s property development segment also booked a revenue growth of 41% YoY, due to spillover revenue from sales in late 2021 when the Home Ownership Campaign (HOC) ended.

• Outlook. MRCB’s construction orderbook as at end-1Q22 stood at MYR7.6bn (excluding Bukit Jalil Sentral), which provides earnings visibility of over five years. On its job replenishment, the group has received a letter of award for the Muara Sungai Pahang Phase 3 project worth MYR380m (vs our FY22 replenishment target of MYR500m). Looking ahead, we opine that MRCB is a frontrunner for MRT3 civil works tenders – given its status as one of the largest bumiputera contractors, in addition to its manageable net gearing level of 0.29x. Its balance sheet could potentially strengthen further via the assets that have been earmarked for disposal, ie Ascott Sentral. Its property development arm is also set to grow, with a healthy level of unbilled sales of MYR818.3m as at end-1Q22 (1Q21: MYR1bn) as the sales momentum continued to gain pace despite the HOC expiry.

• We raise FY22-24F earnings by >30%, 20% and 30% as we: i) Impute a higher job replenishment target for the respective years, and this number is not just focused solely on MRT3; and ii) raise the amount to be recognised from LRT3. In the meantime, we also roll forward our valuation base to FY23F. Assuch, our TP rises to MYR0.44 – the figure also includes a 0% ESG premium/discount on the intrinsic value, based on our in-house proprietary scoring methodology. Rerating catalysts could include higher-than-expected property launches. Key downside risks include a prolonged slowdown in the property market and delays in construction projects.

Source: RHB Research - 1 Jun 2022