Malaysian Resources Corp Bhd
(Nov 19, RM1.51)
Maintain “buy” with an unchanged target price (TP) of RM2.05: Malaysian Resources Corp (MRCB) reported a third quarter of financial year 2014 (3QFY14) revenue of RM715.3 million (+70.9% q-o-q, +>100% y-o-y) and core net profit of RM27.4 million (+>100% q-o-q, +>100% y-o-y) respectively. This brings its 9MFY14 core net profit to about RM57 million, representing 83% of our full-year estimate of RM68.3 million and 86% of consensus full-year estimate of RM66 million. The improvement in earnings was mainly due to higher billings from both its property and construction divisions. Also, this quarter includes the operational numbers from the Eastern Dispersal Link (EDL) which is operating at a loss currently. Without the EDL’s amortisation costs, net profit would be stronger.
The construction division recorded revenue of RM185 million (-13% q-o-q, +>100% y-o-y) and earnings before interest, taxes, depreciation and amortisation (ebitda) of RM29 million (+>100% q-o-q, +>100% y-o-y). We understand that earnings for the construction division mainly came from MRCB’s project delivery partner (PDP) fees for the Ampang light rail transit (LRT) extension works as well as ongoing environmental jobs.
In 3QFY14, the property development arm recorded revenue and ebitda of RM329.4 million (+>100%% q-o-q, +>100% y-o-y) and RM48.6 million (+58.5% q-o-q, +>100% y-o-y) respectively. Ebitda margins for the property development division dipped to 15% (from 19% in 2QFY14) mainly because of: i) higher marketing expenses as a result of the group’s marketing efforts for its recently launched development, 9 Seputeh; and ii) the recognition of revenue from the PJ Sentral land deal with Perbadanan Kemajuan Negeri Selangor (PKNS) for RM91.1 million for the settlement of the legal battle.
The company also announced that it had accepted a contract from Desaru Peace Holdings Villas Sdn Bhd for the construction of a conference centre and clubhouses in Kota Tinggi, Johor.
The construction jobs are valued at about RM141 million. The contract duration is for 22 months from the site possession date. The announcement came in as a positive surprise to us.
Assuming a pre-tax margin of 6% for this project, we estimate that this project would be able to contribute to about RM4.6 million and RM3.8 million respectively for MRCB in 2015 and 2016.
Currently, the construction order book stands at about RM1.2 billion (representing about 1.3 times its 2013 construction division revenue), which is mainly from the LRT extension project, environmental rehabilitation works and building jobs. We understand that going forward, the management will focus on infrastructure and environmental jobs (more specialised jobs that also carry higher margins). On prospective jobs, we understand that the company has passed the pre-qualification for a concession for an incinerator project in the Klang Valley in which the tender closes end-December.
Property unbilled sales stand at RM2.9 billion (or about 6 times its 2013 property division revenue.
The rise in unbilled sales of about RM1.1 billion from 1QFY14 is mainly due to the fact that its recently-launched project 9 Seputeh (gross development value [GDV]: RM861 million, average selling price: RM800 per sq ft) has managed to clinch about 60% in sales to date as well as the inclusion of the PJ Sentral en bloc sales (GDV: RM489 million). Currently, we are estimating that these projects will contribute about 20% to 22% to the group’s ebitda margins.
We revise our earnings estimates upwards by about 26%, 8% and 7% respectively for 2014, 2015 and 2016 after: i) increasing the better-than-expected take-up rates of its projects; and ii) increasing our construction order book win assumption to RM1 billion (from RM500 million).
Maintain “buy” with an unchanged TP of RM2.05. Our TP also reflects a 25% discount to our revised net asset value (RNAV) calculation of RM2.74 a share that implicitly factors in the expected value-enhancing exercises and corporate events including more real estate investment trust (REIT) injections. However, we estimate that Kwasa Damansara could further enhance MRCB’s RNAV by 32 sen which we have not included in our valuations pending a management briefing next Wednesday.
There could be a substantial upside to our sum-of-parts valuation which has not factored in likely enhancements from future development projects including phase 2 of PJ Sentral that could add another 51 sen to our RNAV/share.
The share price catalyst is the unlocking value of its investment properties via a REIT venture.— UOBKayHian Research, Nov 19
This article first appeared in The Edge Financial Daily, on November 20, 2014.