• Still BUY, with new SOP-derived MYR0.80 TP from MYR0.70, 18% upside. The Federal Government announced on 29 Mar via a press statement that the Penang Light Rail Transit (LRT) was approved on 22 Mar. The Penang LRT will have a stretch of c.29km with 20 stations, including two interchange stations at Komtar and Penang Sentral – estimated to take six years to be completed, ie by 2030.

• Contracts for the Penang LRT would comprise three segments – i) Silicon Island to Komtar (Segment 1), ii) Komtar to Penang Sentral (Segment 2) and iii) turnkey systems and rolling stocks. The contract for Segment 1 has been offered to SRS Consortium while the contracts for Segments 2 and 3 would be done via open tenders. We estimate construction works for Segment 2 could likely be worth within the range of MYR3-5bn given that a connection (likely via a rail bridge) is required to link the Penang Island with the mainland.

• Where can MRC benefit? We view Malaysian Resources Corp’s track record for Mass Rapid Transit 2 and Light Rail Transit 3 to put the group at the forefront for Segment 2 of Penang LRT. Furthermore, MRC’s existing role as the developer of Penang Sentral (GDV: MYR2.7bn) adds another convincing element to the picture.

• Even if MRC does not clinch the contract for Segment 2, the construction of the Komtar to Penang Sentral LRT line is bound to have spillover effects on the group’s role as a developer of Penang Sentral itself. The first phase of Penang Sentral is an integrated transportation hub (rail, ferry, and bus) completed in 2018 with the remaining phases (up to seven phases) allocated for a hotel, retail mall, and office tower.

• No changes to our earnings estimates. Taking into consideration the prospects for Penang Sentral’s development following the approval of Penang LRT, we are lowering our discount to RNAV slightly to 35% from 40%. We are also tweaking our ESG score to 3.2 from 3.0 as we view MRC as a strong proponent of flood mitigation and coastal rehabilitation efforts in light of the group being shortlisted for a flood mitigation job by the Federal Government worth between MYR500m and MYR1bn. Previously, MRC secured jobs for flood mitigation and rehabilitation works for Muara Sungai Pahang phase 3 in 2016 and 2022 worth MYR569m.

• As a result, we arrive at a new SOP-derived TP of MYR0.80 (from MYR0.70) which bakes in a 4% ESG premium. We favour MRC in light of its potential significance in upcoming national big ticket projects (Mass Rapid Transit 3 and Kuala Lumpur-Singapore high speed rail (HSR). The stock’s valuation remains relatively undemanding – trading at a 0.7x FY24F P/BV, or -1SD from the KL Construction Index’s 10-year mean, justifying our BUY call.

• A near-term catalyst would be a win for the Phase 1B of Pan Borneo Highway Sabah (average job package estimated at MYR600-800m). A key risk would be the inability to quickly replenish its orderbook.

Source: RHB Research - 1 Apr 2024