• Maintain BUY and MYR0.45 TP, 37% upside with c.2% FY23F yield. Malaysian Resources Corp’s FY22 core earnings of MYR64.8m (+>100% YoY) met our but missed Street full-year estimates – constituting 103% and 92% of full-year projections. With commendable job prospects in hand – three bids submitted for Mass Rapid Transit 3 (MRT3) and a possibly larger-than-expected job value to redevelop the Shah Alam sports complex, its valuation appears undemanding. This stock is trading at 18x FY23F P/E, which is -1SD from the 5-year mean.

• Performance review. The >100% YoY growth in FY22 core earnings was partly due to the consolidation of the Light Rail Transit 3 (LRT3) project company, Setia Utama LRT3, which took MRC’s ownership to 100% and allowed it to recognise 100% of project earnings. On further scrutiny, the LRT3 project reached physical progress of 81% as at end-FY22 (slightly over the targeted 80% completion) due to normalising operating conditions. As such, the construction segment reported an EBIT of MYR70m in FY22 (FY21 LBIT: -MYR41m). Likewise, its property arm recorded a 15% YoY EBIT growth for FY22, backed by a combination of sales from completed unsold inventory as well as units from on-going projects – mainly Sentral Suites and TRIA 9 Seputeh, which contributed 63.5% and 28% to FY22 property revenue worth MYR539.6m.

• Outlook. MRC’s construction orderbook as at end-FY22 stood at MYR6.4bn (excluding the Bukit Jalil Sentral project), which provides about three years’ of earnings visibility, with an open tenderbook size of MYR30bn. We continue to reiterate MRC’s advantage in the MRT3 bids, given its status as one of the largest bumiputera contractors. Aside from this, MRC’s role to redevelop the Shah Alam sports complex may entail a price tag that is larger than the MYR787m mooted earlier by the Selangor State Government back in Jul 2022 – likely to be c.MYR1bn. We have yet to impute any earnings estimates from the Shah Alam sports complex, pending details (contract value and details of land swap) that may likely be revealed in 2Q23, in our view.

• Earnings estimates. We make no changes to our FY23-24F earnings as MRC’s results are in line. We also introduce FY25F earnings, which entail a job replenishment assumption of MYR300m – backed by potential jobs likely in the waste-to-energy segment. As earnings estimates are unchanged, our SOP-derived TP of MYR0.45 remains as is (which also includes a 0% ESG premium/discount on intrinsic value, in accordance with our in-house proprietary scoring methodology). We favour MRC for diversifying its property arm into industrial properties, ie Ipoh Raya Integrated Park, and new overseas markets like Australia and New Zealand (total GDV: >MYR1.5bn). An upcoming catalyst would be the potential re- instatement of omitted works for LRT3 worth c.MYR1bn

• Key downside risks include a prolonged slowdown in the property market and regulatory risks impacting project timeline rollouts and costs.

Source: RHB Research - 21 Feb 2023