Malaysian Resources Corp Bhd
(July 9, 60 sen)
Maintain buy with an unchanged target price (TP) of RM1.01: According to The Star, to curb the spiraling cost which ballooned up to RM15 billion (versus RM9 billion previously), Prasarana Malaysia Bhd has indicated its intention to take over the construction of light rail transit Line 3 (LRT3) from its project delivery partners (PDPs).
Malaysian Resources Corp Bhd (MRCB) and George Kent (Malaysia) Bhd were appointed by Prasarana as the PDPs for the LRT3 project with an approved construction budget of RM9 billion as well RM1 billion for land acquisition cost. The PDPs are responsible for the design and construction of LRT3, in addition to assuming the risks of cost overruns or delays. We understand that the overall project milestone has reached a 10% progress rate to date.
Prasarana may seek an additional budget from the government as the consortium currently has the approval to raise up to RM10 billion. To raise additional funds, the company may need cabinet approval. Cost escalation comes from design changes to the original LRT3 plan, such as adjustments to accommodate new features and bigger capacity of 26 station along the 37km line.
We believe MRCB would not be affected if Prasarana could not raise additional funds for the said LRT3 project as our forecasts are based on the approved construction fees of RM9 billion instead of RM15 billion. At this stage, we believe the PDPs and Prasarana are in discussions to address this matter and there are no signs that Prasarana will take over the project from the PDPs to date. As for MRCB, the assumed earnings contribution from LRT3 is 3% of financial year 2019 forecast (FY19F) net profit and accounts for 4% of our sums-of-parts valuation (SOTP).
Our TP is based on a 20% discount to our SOTP valuation of RM1.26 per share, implying 24.3 times FY19F price-earnings ratio. — UOB Kay Hian, July 9
This article first appeared in The Edge Financial Daily, on July 10, 2018.