MRCB’s infrastructure outlook increasingly rail-focused

This article first appeared in The Edge Financial Daily, on January 4, 2018.
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Malaysian Resources Corp Bhd
(Jan 3, RM1.25)
Maintain add with a higher target price (TP) of RM1.31:
With 2018 being an “election year”, along with a massive pipeline of infrastructure projects (driven by rail), we are turning more upbeat on Malaysian Resources Corp Bhd (MRCB).

The group’s infrastructure outlook is shaping up to be more rail-focused (Kuala Lumpur-Singapore high-speed rail’s [HSR] and East Coast Rail Link [ECRL]), especially for the Gamuda Bhd-MRCB joint venture, which will be gunning for the project delivery partner (PDP) scope of the HSR project. Supported by Gamuda’s rail credentials, MRCB could land its second, but much larger-scaled, PDP contract after the light rail transit Line 3’s RM9 billion.

Toll collection for the 100%-owned Eastern Dispersal Link (EDL) was abolished on Jan 1, 2018. This is part of the government’s initiative under Budget 2018, whereby toll collections for three highways, namely Batu Tiga, Shah Alam and Sungai Rasau in Selangor, Bukit Kayu Hitam in Kedah, and the EDL, will be discontinued. The expected annual toll compensation is RM70 million as reported by the press, which quoted the second finance minister.

The Edge Markets reported recently that MRCB has been invited by the works ministry to commence negotiations on terms of the “mutual termination agreement” for the EDL’s concession.

We view this development positively as it would bring MRCB closer to concluding the delayed EDL deal, carve RM1.1 billion of the EDL sukuk (25% of total debt) off its balance sheet, and remove a big overhang on the share price. With an EDL sale, its end-September 2017 net gearing of 1.1 times would drop to 0.75 times (by our estimates).

We believe MRCB’s construction prospects would be enhanced by potential new rail tenders. MRCB and Gamuda Bhd will be collectively bidding for the PDP role of the HSR infrastructure construction on the Malaysian side. Based on our calculation and an assumed 6% PDP fee, financial year ending Dec 31, 2019 (FY19) to FY20 earnings per share could nearly double with the HSR PDP scope.

We believe the worst is over for its share price, having fallen 3.5% in 2017. The stock trades at a 20% discount to its fully diluted revised net asset value (RNAV) of RM1.45.

This is unjustified, in our view, given the renewed infrastructure/order replenishment outlook and revival of the EDL divestment angle, which is long overdue.

We think the group’s RM2.9 billion total value of jobs in tender has more upside in 2018. Our assumed RM800 million job wins per annum could be exceeded if it achieves higher-than-expected success rates for its rail tenders.

We believe the rail contract news flow in the first half of 2018 could revive sentiment on the stock. We retain “add”, in view of the likely positive construction news flow in the months ahead. Our TP is raised as we revise the value of selected land banks (at an unchanged 10% RNAV discount). We expect more details of the HSR PDP tenders in the next two to three months. Potential PDP awards are likely by mid-2018. A key downside risk is weak job wins. — CIMB Research, Jan 2