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MRCB (AmResearch) re-initiating Hold; fair value RM2.13

Investment Highlights

• We are re-initiating coverage on Malaysian Resources Corp Bhd (MRCB) with a HOLD rating and fair value of RM2.13/share based on 15% discount to our sum-of-parts valuation (SOP) of RM2.50/share.

• We see value in MRCB due to its expected involvement/major role in the redevelopment of the federal government’s land in Sg Buloh, and a possible strong uplift to the  construction order book from the 10MP rollout. However, we are of the view that there is limited upside to the stock, which has done well after gaining about 50% since early of the year and is trading at just an 19% discount to our SOP.

• We understand MRCB has been assisting the Employees’ Provident Fund (EPF) in drawing up the masterplan for the Sg Buloh land. Thus, the group should be among the  favourites to get one of the first pockets of land there. Details are sketchy at this juncture but the government is expected to announce the award and details by 1Q11.

• Gauging from past experience, MRCB group prefers to go at it alone. It currently has two low-key township developments in Perak and Kajang, with a combined GDV of RM4bil. Admittedly, its track record in residential development is not significant, which means JVs with other developers should come in handy.

• Management has guided that its involvement in the redevelopment of federal land would most likely be limited to Sg Buloh given that the Cochrane land is now to be auctioned off, rather than given outright to MRCB as previously speculated by the market.

• The crystallisation of the prime KL Sentral land is progressing well. Currently, MRCB and its partners are developing about RM4bil worth of office and retail buildings. The group is also looking at expanding this development – eyeing about 20 acres of land nearby although this is not expected to happen in the immediate term.

• Elsewhere, management is targeting new construction contracts in the region of RM1bil next year, most of which will come from the rollout of the 10MP infrastructure works. We also do not discount the possibility of MRCB getting a slice of the civil works of the RM43bil MRT project.

• Our earnings estimates for FY10F-FY12F at RM56mil-RM71mil would mostly be underpinned by:
(1) KL Sentral development and
(2) Eastern Dispersal Link billings and (3) construction order book renewal of RM500mil annually.

• At current price, MRCB is trading at a narrow 19% discount to our SOP and is rather pricey at an FY11F PE multiple of 45x.

RE-INITIATING COVERAGE WITH HOLD


We are re-initiating coverage on Malaysian Resources Corporation Bhd (MRCB) with a HOLD rating and fair value of RM2.13/share based on a 15% discount to our sum-ofparts (SOP) valuation of RM2.50/share.

Our SOP includes the potential earnings from the redevelopment of the Sg Buloh land. We have assumed a conservative RM2bil GDV (or 20% of total GDV of RM10bil) with a 25% margin and assuming a 50% stake. We discounted this over 10 years.

There is some excitement about MRCB given:
(i) its expected involvement/major role in the redevelopment of federal government’s land in Sg Buloh, while
(2) its construction order book should get a strong uplift from the 10MP projects rollout. However, we think there is a limited upside to the stock.

The stock has done well in gaining about 50% since the middle of the year and is trading at just an 19% discount to our estimated SOP.

  • Redevelopment of Sg. Buloh land
We understand MRCB has been assisting the EPF in drawing the masterplan for the said land. The group was even offered a role as project manager for the development but this was rejected by the group. It is understood that MRCB wants to bid for the parcels of land, just as other developers would.

We believe that since it has been helping out EPF in the should be among the favourites to get one of the first pockets of land. However details on the plot ratio, size of
initial development, etc, are not available as yet. But we understand that the government is expected to announce the award and details by 1Q11.

Admittedly, MRCB’s track record in residential development has not been significant, which means JVs with other developers should be handy. But naturally, there should be some commercial development within the proposed township.

Based on its track record, the group prefers to undertak development projects on its own. It currently has two township developments in Perak and Kajang with a combined GDV of RM4bil.

We also understand that MRCB would not be interested in doing the infrastructure works for the federal land as management does not see any great value-accretion from that. While those jobs would boost topline quite considerably, weak margins would hamper its bottomline.

  • Why do we like Sg Buloh land?

Earlier this year, the prime minister announced that the government had identified and would put out the tender several land parcels for property projects to boost the economy. These include:
(i) the redevelopment of the Malaysian Rubber Board (MRB) land (3,300 acres) in Sg Buloh;
(ii) redevelopment of Sungai Besi Airport (400 acres);
(iii) redevelopment of Angkasapuri complex as Media City
(iv) KL International Financial District (Merdeka Square);
(v) masterplan and coupled with its link to EPF, the group

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Land reclamation in West Port.

The government and the Employees’ Provident Fund (EPF) will form a joint venture to promote the development of the 3,300 acre-land in Sg. Buloh into a new hub for the
Klang Valley. This land, owned by the MRB, is believed to have a gross development value of RM10bil.

We think this is a very positive move by the government given the scarcity of land in the Klang Valley where high land costs have resulted in very pricey residential properties. Homebuyers are now looking at prices of RM0.7mil-RM1mil for double-storey link houses in prime areas such as Bandar Utama, TTDI, etc.

And that is in the secondary market where some of these houses were developed some 10-15 years ago. Thus, it is not surprising to see Sam Ling’s Desa Park City’s latest terrace house offerings at RM1.8mil per unit! Looking at the neighbouring areas of the MRB land such as Subang, Kota Damansara, Shah Alam and Sungai Buloh, land scarcity is prevalent even in recently developed Kota Damansara where only 30-40 acres of land are left available for development – most if not all are meant for high-rise developments.

At 3,300 acres, the MRB land is about 3x the size of Petaling Jaya. Given it is bounded by the matured townships in Subang and Damansara and partly Sg Buloh, this parcel of land most certainly has a significant development potential.

  • So how will it work
From what we gather, EPF would be the landowner/master developer with multiple JVs expected. Major property players will be invited to enhance the development of the prime land.

MRCB the role of project manager of the entire development. However, MRCB prefers to be directly involved in the development rather than being a project manager.

Further to that, the company is also not interested in infrastructure works for the land which we think is a plus point as this work portion could hamper margins.

KL SENTRAL PROGRESSING WELL

KL Sentral’s development is progressing well with over RM4bil of GDV having been completed. Currently the group, together with its partners, are undertaking RM4.3bil worth of development, to be completed mostly in 2012. Most of the development centres on Lot G, comprising two office towers, one retail mall and a hotel, with a gross floor
area of about three million sq ft.

The retail mall, to be called Nu Sentral Mall, will be kept for rental income.Heavy traffic volume within the area would provide a strong rental base for MRCB. Recall that recently the
group has secured Golden Screen Cinemas and Parkson as anchor tenants.

In addition, two more properties – KL Sentral Park and 348 Sentral (office and apartments) – would also be injected into its property investment units for rental income. We
understand that about 53% of tenants have been secured for KL Sentral Park and Shell would be taking up 348 Sentral office.

  • RM6bil for remaining development
There will be about RM6bil worth of GDV remaining for development in KL Sentral with construction to start mostly in 2011 and 2012. This development would include office
suites (Lot B), office towers, St Regis Hotel/Residences,and a luxury high-rise development (JV with CapitaLand and Quill).

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We gather that the group is eyeing a neighbouring landbank of 20 acres for the expansion of KL Sentral. However, nothing has been firmed up yet and the group is not in a hurry as there is plenty of work still to be done in KL Sentral itself.

CONSTRUCTION ARM FINALLY TURNINGAROUND?

At inception, MRCB was a construction and property development outfit. However, in the following decades the group diversified into media with the acquisition of TV3 and
The New Straits Times (NSTP). Later on, the group would expand into banking when it acquired RHB and power generation. However, after the Asian financial crisis in 1997, all these assets were disposed of to de-leverage its balance sheet. In 2002, RHB was divested to Utama Group while three of its IPPs were sold to Tenaga Nasional in 2001.

This unit has been bogged down by execution issues – cost overruns, provisions for escalating materials costs - where losses dragged down the group’s earnings over the past few years.  It was only last year that the construction unit had made an operating profit after five consecutive years of losses.

  • Recently awarded two new contracts
Recently, MRCB had replenished its order book with two new contracts worth RM190mil – for the construction of Sabah Medical Centre and Marlborough College. These two contracts boosted its orderbook to about RM900mil (excluding the construction works of KL Sentral worth RM1.2bil) which is about 1.4x FY09 division’s revenue.

The group is targeting at least RM1bil of new jobs next year, to be underpinned by 10MP projects. Among others, it is eyeing some portion of the civil works for the RM43bil MRT project proposed by MMC and Gamuda. The group is also expecting a renewal to the environmental projects, i.e the Sungai Pahang rehabilitation project, valued circa RM200mil. In addition to that, the group is looking at RM300-RM400mil worth of new transmission jobs from Sabah and Sarawak.

Although it is shortlisted for the RM8bil LRT extension work, we think MRCB is in for tough competition given all the other major players with the likes of IJM, WCT, and Gamuda are all shortlisted.

EARNINGS ESTIMATES

We are estimating core net profit of RM56mil-RM71mil for FY10F-FY12F. Our forecast would be underpinned mostly by
(1) billings from KL Sentral Development and
(2) billings from the construction of Eastern Dispersal Link and an orderbook renewal of RM500mil annually. We have not included the potential earnings from the redevelopment of the MRB land given that details on the project are very sketchy at this juncture. As mentioned, announcements are expected to be made by 1Q11.

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