Not all about RRIM land

* feedback from conference was positive

* hunky environmental projects in the pipeline; solidifying KL Sentral presence

* intain BUY and SOP-derived RM2.25 TP, highconviction pick for the sector

We hosted MRCB at DBSV Pulse of Asia Conference in Hong Kong. Attendance was good and feedback was positive. Besides the core key catalyst -- MRCB’s participation in the 3,000 acre RRIM land -- we believe there are other catalysts to look forward to.

Chunky environmental projects. We understand there could be c.RM4 billion worth of environmental projects when the 10MP is tabled. This is MRCB’s niche - a case in point is its current RM258 million Sungai Pahang rehabilitation project, from which it could bag another RM1.4 billion in additional works.

Margins for such contracts are also lucrative at 15%-20%, double that for average infrastructure contracts, while competition in this space is limited. Other potential contract wins amount to RM700 million, 1.8x our FY2010F order win forecast. This is for the Sungai Prai environmental project, Putrajaya building, hospital job, and infrastructure works in Penang. It is also bidding for the c.RM7 billion LRT extension.

Saving some KL Sentral gems. MRCB’s balance sheet was insufficient to retain investment properties when KL Sentral first started. On a stronger footing now, 40% of space at Lot 348 due is for completion in 2012, where Shell has signed a 15-year lease to take up 60% of the NLA at rentals starting from RM8.50 psf. It is also retaining Lot E despite the offer of RM1,200 psf (cap rate of 6%), which could be a new benchmark for office space in Malaysia.

Shell has the option to take up the other 40% of space and also the adjacent service apartments to be managed by Ascott. We do not discount potential en-bloc sales after two to three rental reversion cycles. Property investment, coupled with its concessions, DUKE and EDL, should be bigger contributors by 2013.

Other key takeaways

Protecting margins. In the last two to three quarters, MRCB had taken extra measures to protect its construction and property margins. For example, it had purchased on bulk basis 104 lifts and 40 escalators for a total cost of RM104m, saving RM36m or 26% of original cost. More recently, it entered into an agreement with a steel supplier to purchase forward up to 30 tonnesof structural steel (12-14 months usage) at RM2,400/tonne; MRCB is of the view that prices could rise to RM2,800/tonne and stabilise at that level.

Stable income from concessions. MRCB’s 18km Duta Ulu-Kelang Expressway (DUKE) urban concession started tolling in May 2009, but was only completely operational towards 4Q2009. We understand traffic volume has been robust at c.88,000 vehicles/day, just short of the breakeven level of 90,000. When its other concession, the Eastern Dispersal Link (EDL), is completed in September 2011, profits from its concession business could be substantial by 2013. We understand there could be two more concession projects in the pipeline.

Other catalyst and wildcards.There may be new design and build contracts for five mini hydro plants in Perak worth an estimated RM60 million. Margins should be lucrative given that the contracts are likely to involve design works. MRCB currently has a RM108 million contract to build a 275KV switchyard for Bakun in Sarawak.

A potential wildcard is its Penang Sentral Development, essentially to transform Penang into the largest transport hub in Malaysia’s northern region. This project was mooted several years ago but was shelved following the March 2008 general elections. We understand the company is in discussions with the Federal Government, but it is still unclear if this project will be revived. At the very least, we think the first phase -- RM300 million construction contract for the Penang Sentral Main Terminal - will kick off. This is because the RM12.5 billionn MMC-Gamuda Northern Double Tracking will be completed in 2013.

Cut FY10-FY12F earnings.We cut FY2010-FY2012F EPS by 28%-31% to 3.7 sen, 4.7 sen and 4.7 sen, respectively, after excluding Lot E from our forecasts as MRCB will be retaining it as investment property post-completion in 2011. This is purely academic, in our view, as with the adoption of IFRIC 15, we would have to adjust our numbers eventually. Moreover, our valuation is based on SOP methodology. Our forecasts do not include the launch of Lot D residential development.

Lot D will now be launched in 1Q 2011 instead of mid- 2010. This RM1.2 billion high-rise residential project will be jointly developed with CapitaLand and Quill Capita, and priced from RM900 psf depending on the orientation of the units. The delay is due to the complexity of the project, with 52-stories and more than 700 units. Given that the Housing Development Authority requires hand over within 36 months of launch, MRCB will commence piling and some above-ground works before the official launch.

1Q2010F result preview.MRCB’s 1Q2010 result is due out on 17 May. We expect it to be weak but not representative of full year performance.This would be largely due to the timing of construction profit recognition; hence, MRCB should meet our full-year forecast. FY2010-FY2011F earnings will be underpinned by the ramped “S” curve construction progress at KL Sentral for Lots A, 348, E and G, which are now only reaching the 10% mark for meaningful earnings recognition, and its RM1.5bn external orderbook. The cyclical earnings recovery should be sustainable given the still low cost environment and construction progress is on schedule.

Valuation.Our SOP value for MRCB is RM2.25/share, with RM0.70 from KL Sentral. We valued its remaining 12-acres of land in KL Sentral (largely Lot B, C, D and F) on DCF basis because we are confident of value crystallising from the maturing franchise. Broadly, our assumptions are 12x plot ratio and ASP of RM1,000 psf. RM0.43/share of our SOP value is from a 50% probability in MRCB clinching development projects on the RRIM land. In this scenario, we assumed the government would divide the 3,400-acre land between six developers/JVs, implying 567 acres for the MRCB-EPF JV. We conservatively assumed 3x plot ratio and ASP of RM300 psf, which implies RM17bn GDV. We have not factored in fee income from its potential master developer status or additional construction jobs from the RRIM land.