This article first appeared in The Edge Financial Daily, on November 11, 2015.

Malaysian Resources Corp Bhd (MRCB)
Nov 9 (RM1.45)
Maintain buy with a raised fair value of RM2.12 from RM1.65 per share: We reaffirmed our “buy” rating on MRCB and raised our fair value from RM1.65 per share to RM2.12 per share — based on a lower discount of 35% (previously 40%) to our revised net asset value (NAV) of RM3.25 per share. 

We have also raised our NAV to account for the accretion to its asset value from its recent prolific infrastructure and land deals: i) Bukit Jalil; ii) phase one of Cyberjaya City Centre (CCC); iii) Kwasa Utama management contract; and iv) light rail transit (LRT) 3 project delivery partner.

MRCB is approaching the tail end of its restructuring moves to optimise its corporate structure, balance sheet and growth trajectory, under the stewardship of the entrepreneurial management team from Gapurna Sdn Bhd. 

Next year would be a lift-off year. MRCB would be moving from restructuring to growth, giving its share price a big kick.

For a start, MRCB is leveraging on the success of KL Sentral to elevate itself as the premier transport-oriented developer. The emphasis is on railway (mass rapid transit and LRT) accessibility and connectivity in urbanised areas and the city centre to drive end-user demand and inward migration. This is the key differentiating factor for MRCB.

Consider the Bukit Jalil (Kuala Lumpur Sports City) and CCC land. To underscore this point, rental rates at KL Sentral have stayed firm due to its status as a transport hub and because of long-term tenancies. 

The early success of KL Sentral will now be replicated across these new projects. With the recent land deals, MRCB’s land bank gross development value has swelled to RM45 billion from just RM11 billion prior to the injection of the Nusa Gapurna land parcels.

MRCB has consciously taken concrete steps to strengthen its construction division. A major earnings drag in the past, it is now leaner with a new-found focus on infrastructure works and more importantly fee income from LRT 3, CCC and Kwasa Utama contracts.

The latter could be worth RM546 million over the next 12 years, making up a quarter of its external order book of RM2.3 billion and a healthy order book cover of 4.5 times. Year to date, MRCB has secured around RM1.5 billion worth of new contracts.

MRCB is cognisant of the need to deleverage its balance sheet. We estimate its financial year 2016 forecast (FY16F) net gearing would rise to 1.6 times (FY15F: 1.1 times) once it fulfils its commitments to ex-German embassy and MX-1 (Kwasa Damansara) land.

But, we are not unduly concerned. Capital locked-up in all its investment properties would be recycled into its real estate investment trust, with the proceeds redeployed to fund its higher return on equity land banking deals. 

Menara Shell (RM607 million) may be next to be injected, followed by Ascott Residences (RM114 million). MRCB is also exploring the creation of private property funds with select institutional investors to co-finance its development projects. — AmResearch, Nov 9