Malaysia Resources Corp Bhd
(Jan 14, RM1.19)
Maintain buy with a target price (TP) of RM2.26: Following the appointment of Gelangang Harapan Construction Sdn Bhd (GHC) as the main contractor for two new development projects, Malaysia Resources Corp (MRCB) paid RM20 million cash and issued additional shares and warrants under the GHC sale agreement.

No changes in financial year 2014 (FY14) to FY16 forecasts until the commencement dates of projects are confirmed. Earnings per share (EPS) and revalued net asset value (RNAV) dilution are minimal.

In accordance with the GHC share sale agreement and following the approval of the grant for the projects on Lot 1 and Lot 2, Section 26, Petaling Jaya, MRCB had on Jan 13, 2015, paid RM20 million cash and allotted 26.4 million MRCB shares at RM1.55 each together with 7.5 million warrants to Gapurna Sdn Bhd as nominated by the GHC vendors in settlement of the balance of purchase consideration of RM60.9 million.

An additional consideration of RM9.1 million will have to be settled through the issuance of 5.9 million MRCB shares at RM1.55 each and 1.7 million warrants when the land grant condition in respect of the Filem Negara Malaysia land is fulfilled and GHC is appointed the contractor.

Pending further confirmation from the management, we believe the contract value from the Lot 1 and Lot 2 developments will be approximately RM1 billion. At a pre-tax margin of 6%, GHC would be able to earn a profit after tax of around RM45 million over three years from the construction contract awarded by Nusa Gapurna Development Sdn Bhd or its subsidiary, Projekmaju Sdn Bhd.

We will however keep our financial year 2014 (FY14) to FY16 core net profit forecasts unchanged until the commencement dates of the two projects are confirmed by the management.

The issue of the additional shares and warrants will however dilute our FY14 to FY16 EPS forecasts for MRCB by 1.5% and lower our fully-diluted RNAV estimate to RM2.64 from RM2.67.

With the share price of this asset-rich group now at a more attractive level, “buy” rating is maintained with an unchanged RNAV-based TP of RM2.26 (14% discount to RNAV).

Key downside risks include delays in property launches and contract awards, a sharp spike in construction costs, further government tightening measures sharply cutting property demand, and unattractive valuation for its concession and investment assets. — Affin Hwang Investment Bank Bhd, Jan 14

This article first appeared in The Edge Financial Daily, on January 15, 2015.