M’sian Resources Corp
? LOI in the bag. A JV between Ekovest and MRCB has received a Letter of Intent (LOI) from the Government, indicating the Government’s intention to obtain the services of the JV as the Project Delivery Partner (PDP) of the River of Life Project. The LOI is subjected to further negotiation between the Government and the JV on the scope and cost of the project.
? A formality. We are more inclined to believe that the news has been priced in by the market. Recall, during a recent analysts’ briefing, MRCB already confirmed the then rumours that a JV between MRCB and Ekovest had submitted a proposal for the clean-up of the KL side of the Klang River (reported to be worth RM8bn). We gathered from other sources that the equity structure of the JV is likely to be “close to equal with Ekovest taking a marginally bigger stake” that suggests 51:49 or if not, 60:40. MRCB guided an initial phase that is worth RM1-2bn in terms of construction value. Also, while acknowledging that payment in kind in the form of development land along the river is acceptable, MRCB is more inclined to think that the bulk of the funding will still have to come from the Government’s coffers (as the land along the river, even after the clean-up of the river, is unlikely to fetch anything close to the clean-up cost). MRCB did hint that the Government was likely to opt for the PDP model (as in the case of Gamuda-MMC JV for the MRT project), and not the usual turnkey contractor, to promote equitable participation of more contractors. Recall, in essence, the role of a PDP in a project is to ensure the delivery of the project “on time and within budget”. A PDP will be remunerated in two ways: (1) A fee; and (2) Profits sharing (or we reckon more precisely “savings sharing”) with the project owner if the final project cost comes in below the budgeted amount.
? Forecasts. We already raised FY12/11-12 net profit forecasts by 25% each when the news first surfaced in Jan 2011, assuming MRCB is to secure RM2bn worth of new contracts per annum (vis-à-vis RM1.0-1.5bn previously), given the even better prospects of it winning new construction jobs with the news.
? Risks. The risks include: (1) New construction contracts secured in FY12/11-12 coming in below our target of RM2bn per annum; and (2)
Rising input costs.
? Maintain Trading Buy. The prospects of the construction sector will be bright in 2011, underpinned by a better job flow, reduced competition and hence margin expansion. For MRCB, an addition earnings kicker may come from it being offered a signifcant role by parent EPF in the
redevelopment of the 2,680-acre RRI land in Sungai Buloh. Indicative fair value is RM2.65 based on “sum of parts” (see Table 4).
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