Malaysian Resources Corp Bhd
(June 21, RM2.20)
Maintain buy at RM2.16 with target price of RM3.02: Our roadshow with Malaysian Resources Corp Bhd (MRCB) reinforced our positive conviction of its imminent growth, largely emanating from the strong performance of KL Sentral, potential development in Sungai Buloh, LRT extension Package 2, “River of Life” project and more prime land acquisitions in the pipeline.

Its recurring revenue model is unfolding nicely, with potential rental/revenue upside from the upcoming Nu Sentral mall and toll road concession in Johor. We still expect recurring revenue to account for 78% to 80% of its 2013 pre-tax profit.

It was recently reported that MRCB could win the RM800 million contract for civil works for Phase 2 of the Ampang light rail transit (LRT) extension line linking Putra Heights to Shah Alam, Selangor. We understand it was the lowest bidder for Package 2, worth RM1.7 billion, and management is positive on the awarding of the contract.

Nu Sentral Retail Mall is 60% rented (including anchor tenants) at RM8 to RM10psf. Management is confident of renting out the remaining 40% of the retail outlets (smaller units) at around or above RM15psf. This is achievable given that Nu Sentral has three ground floors (better pricing mechanism), and a monorail extending to the mall.

Other reputable shopping malls in Kuala Lumpur like The Gardens in Mid Valley City and Suria KLCC are enjoying such rates as well. Furthermore, these malls chalk up strong human traffic volume (over RM30 million a year), benefiting strongly from LRT stations located in or near the malls.

To enhance its property value, MRCB is planning to construct a bridge connecting Sentral Residence and St Regis Hotel & Residences to the National Museum and Perdana Lake Gardens. Currently, the office tower in Q Sentral is 50% taken up at about RM1,200psf and management is targeting to sell the remaining units at RM1,500psf. It is likely to have a MRT cut through the office tower for better accessibility.

We have learned that St Regis Residence received positive response at the pre-launch two weeks ago, with an average selling price (ASP) of RM1,600 to RM2,000psf, comparable with other reputable high-end condominiums like Binjai on the Park (KLCC), Troika and St Mary Residences which are selling at RM1,300 to RM2,600psf.

Our ground checks hinted that MRCB is one of the lowest bidders for the entire LRT extension Package 2 worth RM1.7 billion, which is expected to be announced in late June. Assuming a 5% net margin, we expect net profit contribution of about RM30 million per year from 2012 until 2014, if it clinches the entire package.

Once the contract award is confirmed, we expect this piece of news to stir up more interest in MRCB and provide clearer visibility on the group’s prospects in its construction and property division. MRCB’s ability to top up its order book of RM1 billion worth of new contracts remains intact, and potentially better.

We understand Kwasa Land Sdn Bhd is in the process of transferring land from the Selangor to the federal government and we expect the transfer to be completed by the end of this year or early 2012.

We foresee no reason for delays as the state government gets land premiums straight into its coffers. We still expect MRCB to clinch at least one or the two of nine available land parcels at the 1,214ha Sungai Buloh land.

We believe MRCB has the potential to do sizeable land deals in Selangor, which would allow it develop the biggest township in a mature area with an estimated gross development value (GDV) of RM4 billion to RM5 billion. If successful, this acquisition could potentially lift its GDV to RM12 billion.

We foresee plenty of long-term opportunities to develop more landbank along its highway concessions (Duke and EDL) in Selangor and in partnership on Pos Malaysia’s land in KL Sentral.

We gather the first package of the River of Life project worth RM3 billion will be awarded in mid-July. This signifies a RM1.2 billion order book with its 40% stake in the JV company with Ekovest Bhd.

We raise our FY11/13 net profit forecasts by 10%, 3% and 0% after factoring in the latest project status at the construction and property development divisions. Our forecasts are 18%, 25% and 60% above consensus.

The key risk to our forecasts is the timing of clinching construction projects or federal land.

We maintain our “buy” call and realisable net asset value-based target price of RM3.02.

There is also potential to co-develop a 9.7ha site in Penang Sentral, finalising approval in 2H11, and future property development projects and land acquisitions in the Klang Valley, Johor Bahru and Penang. — UOBKayHian, June 21

This article appeared in The Edge Financial Daily, June 22, 2011.