KUALA LUMPUR: Malaysian Resources Corp Bhd (MRCB) is expected to see a boost to its earnings by as much as 28% for the financial years ending Dec 31, 2016 and 2017 (FY16 and FY17), thanks to the RM9 billion light rail transit Line 3 (LRT3) project.
Last Friday, the joint venture between MRCB and George Kent (M) Bhd was appointed project delivery partner (PDP) for the rail project, beating five other local contenders.
A TA Securities analyst told the digitaledge DAILY that he sees the project enhancing George Kent's earnings given its relatively small market capitalisation of RM414.57 million.
While analysts are positive on the news, it did little to excite the market. MRCB shares closed down one sen or 1% to close at 99 sen yesterday, with 20.04 million shares traded. It has a market capitalisation of RM1.78 billion.
George Kent's stock ended the day one sen or 0.72% higher at RM1.40, with 6.19 million shares changing hands.
CIMB Research senior analyst Shahrizan Rosely estimates that the award would translate into RM19 million to RM25 million of net profit per year for MRCB in FY16 and FY17. This will progressively grow higher towards the project’s completion in 2020 (five years).
This translates into a potential FY16 and FY17 earnings per share enhancement of 14% to 17% per year and revalued net asset valuation boost of 6%, he said.
"The downside risks to the 6% PDP fees are cost overruns, variation orders and delays. This is the reason that the next tender phase for the seven civil work packages remain crucial," Shahrizan said in a note to clients yesterday.
"We believe that the other terms of the PDP would be similar to those of the mass rapid transit. The project owner, Prasarana Malaysia Bhd, is targeting for physical works to commence in the second half of 2016, implying faster execution than that for the RM28 billion MRT Line 2," he noted.
HLIB Research sees MRCB's FY16 and FY17 earnings being enhanced by RM31 million to RM41 million or 26% to 28% with the PDP role in its bag.
The research firm has raised its target price (TP) for MRCB to RM1.36 from RM1.19 , with the "buy" rating intact.
Kenanga Research believes that being the PDP for LRT3 will enable MRCB to secure more contract flows from LRT3 in the near to mid term, which will further boost its existing order book of RM1.7 billion.
"Additionally, the PDP role will easily add RM54 million per year to the group’s bottom line, assuming a clean 6% PDP fee from Prasarana," it said.
Kenanga Research is upgrading MRCB to "market perform" post its appointment as PDP for LRT3 with a higher TP of RM1.10 from 81 sen previously.
"We believe the PDP role for LRT3 will raise its earnings profile in the medium term and may also see potential contract news flow from LRT3. However, the share price has reacted sharply on this news amid weak market sentiment, which may result in profit-taking activities in the near term," it said.
Prasarana is targeting to complete the pre-qualification of contractors by December this year, and commence construction work in early 2016. The whole project is to complete by Aug 31, 2020.
Meanwhile, HLIB Research said Sunway Construction Group Bhd and Mitrajaya Holdings Bhd may emerge as strong contenders for LRT3 work packages.
"We reckoned that MRCB stands to be the prime beneficiary of LRT3," it added in its report.
This article first appeared in digitaledge Daily, on September 8, 2015.