Malaysian Resources Corp; Buy; RM2.19
Price Target: RM3.10; MRC MK

4Q11 included provision for variation orders (VOs) for some construction projects amounting to RM20m. MRCB believe there is strong grounds for claim and a potential write back in 2012 is possible. We understand construction margins for FY11 would be 4% excluding VOs instead of the 1.9% reported.

2012 bottomline growth could be impacted by:- i) higher tax rate as it has utilised most of its tax losses; ii) higher minority interest from Lot D and Lot B; and iii) start up losses and higher interest cost for Eastern Dispersal Link (EDL). However, pretax profit growth should still be decent. We are currently looking at RM107m net profit for FY12F (+38% growth) which is below consensus of RM118m. However, we may look to revise our numbers pending more clarity for EDL and when its KPIs are disclosed in March.

EDL may start tolling in May pending cabinet approval. Based on this, the expected budgeted loss is RM30m to RM40m for FY12F but will be profitable in FY13F assuming traffic volume remains consistent at 70,000 to 80,000 vehicles per day. There will also be higher interest cost as MRCB will unlikely be able to capitalise interest cost going forward (RM7.5m per month) as the project has been completed.

MRCB is still exploring launching a REIT but thinks if it happens in 2012 it will be via injecting its properties into an existing REIT. Lot E has achieved 70% tenancy with average rental rates of RM8.50 psf for office and RM5.50psf for retail. Lot 348 will be delayed up to a maximum of 6 months (realistically one month) but potential LADs may be absorbed by budgeted savings of RM38m from the construction.

With construction flows remaining strong, MRCB has targets to bag at least RM1bn worth of new works in FY12F. It will continue to bid for MRT elevated works, LRT extensions, River of Life projects and environmental projects. On the RM1.3bn LRT contract clinched in 2011, RM450m will be done internally while for the balance MRCB has option to either earn a project fee of 1-2% or participate in the tenders.

Margin guidance for civil works is 3-4%. We maintain our Buy rating and SOP-derived TP of RM3.10. Key catalysts include:- i) potential participation in the RRIM due to its strong parentage; ii) more construction wins; iii) approval for Penang Sentral in 2012 and receiving an official approval for another similar type of project in another state.

Source: HwangDBS Research 10 Feb 2012