This article first appeared in Capital, The Edge Malaysia Weekly, on November 9 - 15, 2015.

With back-to-back contract awards and new projects, Malaysian Resources Corp Bhd’s warrants —MRCB-WA — were among the most actively traded in the past week. Prices for the shares and warrants have risen sharply as well — the shares 75% and warrants 175% from their recent lows in late August to close at RM1.40 and 22 sen respectively last Wednesday.

With a one-to-one conversion ratio and RM2.30 strike price, MRCB-WA already fetches an 80% premium to the mother share. Is MRCB (fundamental: 1.30; valuation: 1.40) fully valued or is there more upside for the stock and warrants?

Recall that MRCB recently announced three projects: the RM1.63 billion National Sports Complex (NSC) refurbishment in Bukit Jalil, the RM3.15 billion Kwasa Utama development and the RM11 billion Cyberjaya City Centre development. Only two months ago, MRCB with George Kent Bhd won the RM11.3 billion tender for the third light rail transit line.

With all these projects in hand, funding has been a key overhang on the company with 112.26% gearing. With investors wondering if MRCB would make a cash call, executive director Imran Salim last week told the press that MRCB could fund the RM1.6 billion NSC and that cash flow would not be a problem.

Keep in mind that the Employees Provident Fund is the company’s largest shareholder with a 38.37% stake. Hence, if it comes to the crunch, MRCB has a strong shareholder to help absorb the projects.

With this in mind, Affin Hwang Capital has a “buy” on MRCB with a RM1.44 target price while AmResearch values the stock at RM1.65. The most bullish is MIDF Amanah Investment Bank, which has  a targt price of RM2.21, Bloomberg data shows.

MRCB is trading at 7.8 times historical earnings, but this includes one-off gains from selling its stake in Platinum Sentral and the Salak South land. It is estimated to be trading around 19 times FY2016 price-earnings ratio.

As it stands, it appears that MRCB is almost fully valued as it will take years to unlock value of its large projects. However, if MRCB can successfully continue with its deleveraging exercises, there could yet be more upside on improved fundamentals.

The biggest boost would be the disposal of its wholly owned Eastern Dispersal Link, which AmResearch estimates to be worth RM1.687 billion (88 sen a share). Letting go of the highway would free up its balance sheet to take on projects with better returns. While that may take time, MRCB-WA has plenty of life left as its expiry is only in September 2018.

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