MRCB. Company Update. Ready for Act II after KL Sentral. BUY (maintain) Price Target: RM1.77 ( ) 28 January MRC MK RM1.

Transcription

1 Construction & Infrastructure 28 January 2010 MRCB MRC MK RM1.33 (ex-rights) BUY (maintain) Price Target: RM1.77 ( ) Company Update 0.00 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Price Performance 1M 3M 12M Absolute +7.5% +9.9% +83.4% Rel to KLCI +7.9% +8.0% +34.8% Stock Data Issued shares (m) * 1,361.3 Mkt cap (RMm) 1,810.5 Avg daily vol - 6mth (m) wk range (RM) Est free float 67.0% NTA per share (RM) * 0.85 P/NTA (x) 1.6 Net cash/(debt) (RMm) * (232.6) ROE (FY09E) 5.4% Derivatives Nil Key Shareholders EPF 30.6% Earnings & Valuation Revisions 09E 10E 11E Prev EPS (sen) * Curr EPS (sen) * Chg (%) Prev target price (RM) * 1.46 Curr target price (RM) * 1.77 * Adjusted for 1-for-2 rights issue at RM1.12 Ong Keng Wee (603) kengwee.ong@affinsecurities.com.my Ready for Act II after KL Sentral Poised to exceed FY09 consensus forecast On the back of a large property development GDV in progress, higher E&C margins as well as steady contributions from the environment and recurring income business divisions, we believe MRCB is poised to exceed consensus FY09 net profit forecast of RM31.3m and may even surpass our forecast of RM34.7m. Strong property development bookings in FY10-13 Collectively, there are as much as RM7.6bn worth of GDV from its KL Sentral developments to be booked in FY10-13 by the various JVs, which MRCB has stakes ranging from 30% to 60%, except for Business Park Sentral which is wholly owned. Office Towers (Lot F) with an estimated GDV of RM2.3bn has been kept for future development. Ready for Act II after substantial completion of KL Sentral in 2013 With the KL Sentral development expected to be substantially completed by 2013, management is making plans for Act II at least a substantial land acquisition to be funded with estimated rights proceed of RM501m. The success chalked up by MRCB in the KL Sentral development raise our confidence that Act II would be equally substantive and positive for the company. External and internal construction order books of RM1.6bn and RM1.2bn With an outstanding E&C order book of RM2.8bn (RM1.6bn from external projects and RM1.2bn from KL Sentral property construction jobs), MRCB is actively tendering for key infrastructure projects. E&C operating margins are also expected to improve as construction material costs stabilise and the company optimises costs through bulk purchases. BUY maintained with TP of RM1.77 ex-rights Pending the release of the 4QFY09 results next month, we are keeping our FY09-11 forecasts unchanged. Incorporating the rights proceeds and on higher ratings for its E&C and environment businesses, RNAV per share ex-rights is raised to RM1.96 and TP ex-rights to RM1.77, after a 10% discount to RNAV. Since we have not taken into account any value enhancement from prospective acquisitions with the rights proceeds, we believe a 10% discount to RNAV (instead of 20% applied previously) is reasonable. We believe better-than-expected results in the next few quarters as well as a substantial land bank acquisition will drive share price higher. Earnings and Valuation Summary FYE 31 Dec E 2010E 2011E Revenue (RMm) , ,112.6 EBITDA (RMm) Pretax profit (RMm) 69.8 (41.0) Net profit (RMm) 40.7 (55.5) EPS (sen) 3.0 (4.1) EPS growth (%) (31.9) (236.3) > PER (x) 44.4 n.m Core net profit (RMm) 40.7 (55.5) Core EPS (sen) 3.0 (4.1) Core PER (x) 44.4 n.m DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit (RMm) Affin/Consensus (x) * Per share data adjusted for 1-for-2 rights issue at RM1.12 per share Important disclosures at end of report Page 1 of 6

2 Poised to exceed FY09 consensus forecast The profit turnaround since 1QFY09 is expected to continue in 4QFY09 and the next three financial years on the back of a large property development GDV in progress, higher E&C margins and hence profits, as well as steady contributions from the environment and recurring income business divisions. We believe MRCB is poised to exceed consensus FY09 net profit forecast of RM31.3m and may even surpass our forecast of RM34.7m. Strong property development bookings in FY10-13 It is well known that MRCB has a large property development GDV in its flagship KL Sentral development. Four projects are now on-going Retail Mall & Office Tower (Lot G, Parcel A & B), Office Towers & Hotel (Lot G, Parcel C & D), Business Park Sentral (Lot E), and Office/Service Apartment (Lot 348) with a total GDV of approximately RM3.9bn and scheduled for completion in 2011/12. Three other projects Condo (Lot D), 1 IFC Office Tower/Hotel/Residence (Lot C), and Office Tower (Lot B) with an estimated total GDV of RM3.7bn are scheduled to be launched this year. Collectively, there are as much as RM7.6bn worth of GDV to be booked in FY10-13 by the development JVs, which MRCB has stakes ranging from 30% to 60%, except for Business Park Sentral which is wholly owned. The Office Tower in Lot A is wholly owned by CIMB-Mapletree Real Estate Fund 1 while Office Towers (Lot F) with an estimated GDV of RM2.3bn has been kept for future development. Fig 1: MRCB property development projects Projects GFA GDV Expected Expected Remarks (sf) (RMm) Commence Completion KL Sentral Retail Mall & Office Tower - Lot G, Parcel A & B 1,471,000 1, Ongoing - MRCB (51%), PHBB (49%) Office Towers & Hotel - Lot G, Parcel C & D 1,146, Ongoing - MRCB (60.0%), Aseana (40.0%) CIMB-Mapletree Office Tower - Lot A 834, Ongoing - CMREF 1 (100%) Business Park Sentral - Lot E 578, Ongoing - MRCB (100%) CapitaLand-Quill-MRCB Condo - Lot D 1,418,752 1, Prospective - MRCB (51.0%), CIPL (39.0%), QCSB (10.0%) Office / Service Apartments - Lot 348 1,030, Ongoing - MRCB (40.0%), Gapurna (60.0%) 1 IFC Office Tower / Hotel / Residence - Lot C 1,399,689 1, Prospective - MRCB (30.0%), CMY (60.0%), Jitra Perkasa (10.0%) Office Tower - Lot B 1,399,972 1, Prospective - MRCB (40.7%), Quilll (34.3%), KFH (25.0%) Office Towers - Lot F 3,205,183 2, Future development Sub-total 12,482,887 10,277 Selangor Taman Kajang Utama (residential development) 473, on-going 2009 MRCB (100%) Selborn 2, Shah Alam (office tower) 457, MRCB (60%) Sub-total 930, Penang Penang Sentral development (PHBB) 3,000,000 2, MRCB (49%), PHBB (51%) Penang Island property development (PHBB) 2,500, PHBB (100%) Sub-total 5,500,000 2,500 Negeri Sembilan Senawang Sentral (industrial park) 560, on-going 2012 MRCB (70%) Sub-total 560, Perak Bandar Seri Iskandar (mixed development) 348 MRCB (70%) Sub-total 348 Grand Total 19,473,879 13,403 Source: Company data, Affin estimates Page 2 of 6

3 Ready for Act II after substantial completion of KL Sentral in 2013 With the KL Sentral development expected to be substantially completed by 2013, management is making plans for Act II hence the various reports and speculations of MRCB acquiring parcels of federal land strategically located in the Klang Valley for development. The soon-to-be completed rights issue, which will raise approximately RM501m, indicates that a substantial land acquisition is indeed imminent. (As at 30 September 2009, its net gearing stood at 1.1x. Adjusted for the rights proceeds, net gearing would be 0.4x.) Speculations so far include 150 acres in Jalan Cochrane, acres in Jalan Ampang Hilir, 400 acres in Sungai Buloh and around 20 acres in the vicinity of KL Sentral. The success chalked up by MRCB in the KL Sentral development raise our confidence that Act II would be equally substantive and positive for the company. External and internal construction order books of RM1.6bn and RM1.2bn Outstanding E&C order book amounted to RM2.8bn, with RM1.6bn from external projects and RM1.2bn from KL Sentral property construction jobs (including RM214m for the CIMB Office Tower in Lot A). With current outstanding jobs scheduled for completion in 2011/12 and to further boost its order book, MRCB is actively tendering for key infrastructure projects, including the terminal building for the LCCT, LRT extensions, government buildings and river rehabilitation jobs. The outlook for power transmission jobs seems less bright, with the latest BETG contract worth RM209m going to the Sinohydro-Naim JV and due to non-competitive terms for Tenaga jobs. The group remains positive on the environment business even though no new projects were secured in Management estimates that there are approximately RM2.4bn worth of environment jobs that have yet to be awarded. E&C operating margin averaged 6.7% in 9MFY09 versus 4.6% in 9MFY08 and is expected to improve further to the 8-10% range as construction material costs stabilise and the company optimises costs through bulk purchases. With regard to the latter, the bulk purchases of lifts which are expected to generate 1-2% of savings in project costs. Fig 2: MRCB outstanding order book Key Projects Contract Value Outstanding Value (RM m) (RM m) Expected Commence Expected Completion Engineering & construction Duta Ulu Kelang Expressway (DUKE) (30% equity stake) Q Q2009 Permai Psdychiatric Hospital, Johor Q2008 1Q2011 Eastern Dispersal Link Q2008 3Q2011 Penang Sentral, Phase Melaka River Marina Q2008 1Q2009 Jalan Tun Sambanthan Road Diversion Road upgrading workd around KL Sentral Condominium construction, Gaya Bangsar Sub-total 2, ,346.0 Transmission Lenggeng (N. Sembilan) - Nuni (Bangi) transmission line Jul Q kv line, Gelang Patah - Bkt Batu Sept Q kV line (Pantai - Salak South) & Salak south substation Feb Q kV swtichgerad, substation, Rengit, P Raja, Kluang Aug Q kV switchyard, Bakun, Sarawak Oct Sub-total Environmental projects Kuala Sg Pahang river mouth project Aug Pulau Tioman beach rehabilitation project Aug Sg Perai, Penang river rehabilitation project July Kuala Sg Kuantan river project Nov Sub-total Total 2, ,614.0 KL Sentral property construction Lot A - Office Tower Mar 2009 Mar 2012 Lot Office / Service Apartments Apr 2009 Aug 2012 Lot G - Retail Mall Dec 2008 April 2012 Total 1, ,229.0 Source: Company data, Affin estimates Page 3 of 6

4 BUY maintained with TP of RM1.77 ex-rights Pending the release of the 4QFY09 results next month, we are keeping our FY09-11 forecasts unchanged. We expect our FY09 net profit forecast of RM34.7m to be close but FY10-11 forecasts may have to be upgraded given the large amount of property GDV to be booked progressively between now and However, rating the stock based on FY10 earnings still remain difficult CY10 PER would still be in the twenties even if FY10 EPS forecast is 50% higher. It is also unfair given the strong likelihood of rising profitability in FY We continue to call a BUY on the stock based on its RNAV per share. We are imputing higher ratings for the E&C and environment businesses and now values the KL Sentral assets based on 25% pretax margin on its share of GDVs. Incorporating these as well as the estimated rights proceeds of RM501m on the enlarged share base of 1,361.3m, RNAV per share ex-rights is raised from RM1.83 to RM1.96. Since we have not taken into account any value enhancement from prospective acquisitions with the rights proceeds, we believe a 10% discount to RNAV (instead of 20% applied previously) is reasonable. Target price ex-rights is hence raised to RM1.77. We have also incorporated the dilution impact of the rights issue into our EPS forecasts. We believe better-than-expected results in the next few quarters as well as a substantial land bank acquisition will drive share price higher. Fig 3: MRCB revised net asset value estimate Area Value psf Stake Valuation (m sf) (RM) (%) (RMm) Property Investment - Alam Sentral Plaza Kompleks (Resource) Sentral Sub-total GDV Pretax Mgn Valuation (RMm) (%) (RMm) Property development - KL Sentral developpments 6, , Kajang land Senawang land Bandar Seri Iskandar * Batu Ferringgi development Batu Dumbar development Gelugor development Selborne II (Office Tower) Sub-total 1,332.2 Net Profit PER Stake Valuation (RMm) (x) (%) (RMm) Engineering & Construction Environment Building Services Sub-total Ann CFs NPV Stake Valuation (RMm) (RMm) (%) (RMm) Infrastructure & Concessions - Duta Ulu Kelang Expressway ** Eastern Dispersal Link, JB *** Sub-total Total Asset Value 2,896.8 Less Net 30 September 2009 (733.5) Total Revised Net Asset Value 2,163.3 # No of shares (m) RNAV per share (RM) 2.38 Net proceeds from 1-for-2 rights issue Estimated Total RNAV after 1-for-2 rights issue 2,664.2 No of shares after 1-for-2 rights issue 1,361.3 Estimated RNAV per share after 1-for-2 rights issue (RM) 1.96 * Assumed GDV based on exclusive development rights to 4,000 acres of land ** NPV based on total project cost of RM1bn, IRR of 13% and WACC of 9% *** NPV based on total project cost of RM997m, IRR of 13% and WACC of 9% Source: Company data, Affin estimates Page 4 of 6

5 MRCB: Financial Summary Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) E 2010E 2011E FYE 31 Dec (RMm) E 2010E 2011E Revenue , ,112.6 Growth Operating expenses (748.3) (731.3) (906.6) (926.3) (974.9) Revenue (%) 71% (13%) 25% 6% 6% EBITDA EBITDA (%) 123% (63%) 42% 52% 0% Depreciation (10.0) (11.1) (10.7) (11.3) (12.3) Core net profit (%) 21% (236%) 162% 56% 14% EBIT Net int income/(expense) (89.5) (72.1) (33.0) (33.0) (38.0) Profitability Associates' contribution 13.9 (15.1) EBITDA margin (%) 17% 7% 8% 12% 12% Pretax profit 69.8 (41.0) PBT margin (%) 8% (5%) 4% 8% 8% Tax (26.0) (19.6) (4.9) (19.0) (21.0) Net profit margin (%) 5% (7%) 4% 5% 6% Minority interest (3.1) 5.1 (3.0) (6.0) (5.0) Effective tax rate (%) 37% (48%) 11% 0% 0% Net profit 40.7 (55.5) ROA (%) 2% (2%) 1% 0% 0% Core ROE (%) 7% (8%) 5% 0% 0% Balance Sheet Statement ROCE (%) 10% 2% 3% 0% 0% FYE 31 Dec (RMm) E 2010E 2011E Dividend payout ratio (%) 0% (33%) 52% 34% 44% Fixed assets Other long term assets , , ,094.6 Liquidity Total non-current assets , , , ,324.6 Current ratio (x) Op. cash flow (RMm) (30.6) Cash and equivalents , , ,489.7 Free cashflow (RMm) (20.3) (7.4) 45.5 Stocks FCF/share (sen) (2.2) Debtors Other current assets Asset managenment Total current assets 1, , , , ,380.5 Debtors turnover (days) Stock turnover (days) Creditors Creditors turnover (days) Short term borrowings Other current liabilities Capital structure Total current liabilities , , , ,176.7 Net gearing (%) 45% 84% 104% 0% 0% Interest cover (x) Long term borrowings , , , ,159.6 Other long term liabilities Total long term liabilities , , , ,342.8 Quarterly Profit & Loss FYE 31 Dec (RMm) 3Q08 4Q08 1Q09 2Q09 3Q09 Shareholders' Funds , ,175.6 Revenue Operating expenses (205.2) (223.4) (150.1) (223.8) (250.7) Cash Flow Statement EBITDA (25.8) (19.8) FYE 31 Dec (RMm) E 2010E 2011E Depreciation (2.8) (2.8) (2.7) (2.7) (2.7) EBIT EBIT (28.6) (22.6) (0.1) Depreciation & amortisation Net int income/(expense) Working capital changes (18.0) (8.7) 47.0 Associates' contribution (2.3) (9.2) (1.1) (4.3) 0.0 Cash tax paid 3.3 (21.2) (4.9) (19.0) (21.0) Exceptional items Others (89.0) (93.6) (99.7) Pretax profit (26.0) (25.5) Cashflow from operation (30.6) Tax (0.4) (14.5) (1.5) 2.9 (0.5) Capex (9.5) (18.5) Minority interest (0.4) 0.7 (0.3) (0.0) (1.5) Disposal/(purchases) Net profit (26.8) (39.3) Others (375.3) (30.0) (30.0) (30.0) Core net profit (26.8) (39.3) Cash flow from investing (375.3) (19.7) (39.5) (48.5) Debt raised/(repaid) (344.2) Margins (%) Equity raised/(repaid) EBITDA (14.4) (9.7) Net interest income/(exp) (89.5) (72.1) (33.0) (33.0) (38.0) PBT (14.5) (12.5) Dividends paid Net profit (14.9) (19.3) Others 66.7 (672.5) Cash flow from financing (367.0) Free Cash Flow (20.3) (7.4) 45.5 Page 5 of 6

6 Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are (TR BUY) not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on higher risks ADD Total return is expected to be between 0% to +15% over a 12-month period REDUCE Total return is expected to be between 0% to -15% over a 12-month period TRADING SELL Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are (TR SELL) strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks SELL Total return is expected to be below -15% over a 12-month period NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Investment Bank Berhad ( Affin Investment Bank ) based on sources believed to be reliable. However, such sources have not been independently verified by Affin Investment Bank, and as such Affin Investment Bank does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Under no circumstances shall Affin Investment Bank, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of Affin Investment Bank as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. Affin Investment Bank and/or any of its directors and/or employees may have an interest in the securities mentioned therein. Affin Investment Bank is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. Investors are advised to seek independent financial, legal and other advice and make their own evaluation on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Affin Investment Bank Bhd (9999-V) A Participating Organisation of Bursa Malaysia Securities Bhd (Stockbroking Division) research@affinsecurities.com.my Tel : Fax : Page 6 of 6