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Cash flow issues may arise as MRCB takes on mega jobs

KUALA LUMPUR (Oct 30): Malaysian Resources Corp Bhd (MRCB) may face cash flow issues as it takes on two mega projects worth RM4.78 billion, analysts said, expecting the group’s net gearing to double assuming full debt funding of the deals. They also see MRCB undertaking a cash call to fund the projects.

On Wednesday, MRCB announced that it had bagged two contracts to upgrade facilities at the National Sports Complex in Bukit Jalil here for RM1.6 billion and  to develop a commercial project named Kwasa Utama in the Kwasa Damansara township here for RM3.1 billion. It also proposed a 70:30 joint venture with Cyberview Sdn Bhd to develop 53.4 acres (21.6ha) of land in Cyberjaya, Selangor, with its 70% stake amounting to RM269.5 million.

“While we laud the management’s capabilities in securing such attractive deals, we are not entirely positive with its landbanking ambitions and construction contracts being paid in kind which will further tax the group’s cash flow,” said Kenanga Research in a report yesterday.

“We are concerned of its already high net gearing of 1.12 times as at June 30, 2015, which will be further weakened to [a net gearing of] 2.27 times assuming full debt funding of these deals,” it added.

Kenanga Research noted that at 1.12 times, MRCB’s net gearing is already relatively high compared with its peers that ranges from 0.3 times to 0.4 times. “Based on simple extrapolation, MRCB would have to fork out a whopping RM2.65 billion to fund its land bank replenishment ambitions in Kwasa Damansara, German embassy land, Cyberjaya mixed development and Bukit Jalil.”

The research firm also sees the group undertaking a cash call to fund its various projects.

HLIB Research said the contribution of the management contract with Kwasa Utama Sdn Bhd (KUSB) is unlikely to be profound in the near term as the contract will be spread across 12 years. However, it is positive on the contract win as it would provide MRCB with a steady stream of workflow for over a decade.

HLIB Research said the management contract would feed MRCB with RM262 million worth of jobs per year from 2016 to 2027.  “While the National Sports Complex’s upgrading job significantly boosts MRCB’s year-to-date job wins to RM2.2 billion, bringing its order book to RM3.1 billion, excluding the management contract and the Light Rail Transit 3 project delivery partner contract.

“This translates to a superior order book cover ratio of six times on financial year 2014 (FY14) construction revenue,” HLIB Research said.

CIMB Research estimates that MRCB’s net gearing could rise from 1.2 times to 1.8 times from the new deals, with downside potential via the group’s ongoing rationalisation. “MRCB’s outstanding external order book (excluding in-house property jobs) stood at RM889 million as at the end of second quarter FY15 (2QFY15) and should be good for the next two to three years,” it said.

“By our estimates, the projects’ impact on our FY16 to FY17 earnings is negligible if we consider the potential rise in interest costs over the next one to two years arising from the initial funding requirements of all three deals, assuming the majority of it is debt funded,” added CIMB Research.

Affin Hwang Capital Research said financing and execution risks are the key concerns given the large scale of the projects. Nevertheless, the firm projected the management contract with KUSB will lift MRCB’s pre-tax profit by an average of RM15.6 million per annum over the next 12 years.  “The three projects will leapfrog its construction and property development operations in the long run,” the firm said, adding that there is potential upside to its forward earnings forecasts and revalued net asset valuation from these three projects.

Seven out of 10 research houses covering MRCB have an “add” call on the stock, implying they are still bullish on the counter.

However, Kenanga Research has placed MRCB under review pending further clarification from the management. It had a “market perform” call prior to this.

Shares in MRCB have been on the uptrend since Aug 21, which saw the stock climb as much as 45 sen or 55.6% to close at its five-month high of RM1.26 yesterday, giving it a market capitalisation of RM2.25 billion.

The current share price represents a 25 sen or 19.84% discount to the consensus target price of RM1.51, according to Bloomberg data.

This article first appeared in The Edge Financial Daily, on Oct 30, 2015. Subscribe to The Edge Financial Daily here.

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