Equity | Malaysia Property Produced by KAF-Seagroatt & Campbell Securities Sdn Bhd Important disclosures can be found in the Disclosure Appendix MRCB Brimming with potential We re-initiate coverage on MRCB with a higher TP of RM1.60 (35% discount to NAV). 2017 will be a lift-off year for MRCB, as the group moves from optimizing its balance sheet to the execution of a strong pipeline of NAV-accretive deals. Trading at a steep 48% discount to its NAV, the stock is also an excellent election- theme play amid a rejuvenated orderbook and improving balance sheet strength. Financial Highlights FYE Dec (RM m) FY14 FY15 FY16F FY17F FY18F Revenue 1,514.8 1,696.7 1,629.1 2,382.5 2,578.7 Normalised net profit 16.5 1.0 10.7 63.8 145.7 Normalised EPS (sen) 1.6 1.7 1.9 3.9 7.0 EPS growth (%) n/m 9.8 10.0 104.0 78.6 DPS (sen) 2.5 2.5 2.0 2.0 2.0 Net gearing (%) 152.6 127.2 72.7 121.1 115.1 PE (x) 98.4 78.8 67.0 32.8 18.4 ROE (%) 8.3 15.6 7.8 2.3 5.2 Yield (%) 1.6 1.8 1.6 1.6 1.6 PBV (x) 1.4 1.1 1.0 1.0 0.9 Source: Company, KAF NAV kicker from value-accretive deals Leveraging its early success with KL Sentral, MRCB is set to elevate itself as a premier transport-oriented developer (TOD) following several NAV-accretive landbanking deals in the Klang Valley and Penang with immediate development potential – i.e. Kwasa Sentral, KL Sports City, Cyber City Centre (CCC) and Penang Sentral. The emphasis is on railway accessibility and connectivity in urban areas and the city centre to drive inward migration and end-user demand. MRCB is also exploring the creation of property funds/strategic tie- ups with select government-backed or private institutional investors to part-fund its projects. This has already started with the entry of the EPF as an 80% stakeholder in Phase 1 of KL Sports City for RM421m (~28 acres), with MRCB holding the balance 20%. Restoring its balance sheet health As at 30 June 2016, MRCB’s net gearing stood at 109% (net debt: RM2.7b) vs 190% in FY12. After taking into account proceeds from the second tranche of its placement exercise (RM220m) and disposal of Menara Shell to 31%-owned MRCB Quill REIT (MQREIT MK, RM1.24, Buy) for RM640m, we project MRCB’s net gearing to come down to 73% by year - end (pro-forma target: 71%). Further out, we expect more asset monetization moves by MRCB to lift its balance sheet. Capital locked-up in its investment properties will be recycled into MQ REIT; Menara Celcom and Ascott Sentral may be the next in line. Likewise, MRCB is looking to sell EDL concessions (debts: RM1.1b or ~35% of MRCB’s total debts). Moving into FY17F, our net gearing ratio is projected to rise to 121% vs 73% for FY16F after assuming close to RM1b in funding commitments for a 70% stake each in Kwasa Sentral and CCC (Phase 1). However, if the sale of EDL and Menara Celcom materializes, this could bring down our net gearing again to 53% (pro-forma target: 45%). Key overhang removed – new Bumiputera status opens more doors Having met the Bumiputera shareholding requirements (36%), MRCB has solidified its position as one of the largest Bumiputera-controlled public-listed entities with a sizeable orderbook (RM5.3b) and property landbank (GDV: RM50b). This will pave the way for MRCB to bid for more contracts under the Bumiputera category. Some RM36b representing 46% of the combined value of RM79b for 12 mega infrastructure projects have been earmarked for Bumiputera contractors (e.g. MRT 1 & 2, LRT 3, KL 118, WCE, BBCC, Asia Aerospace City). Its construction unit have been rejuvenated, with a newfound focus on higher-margin infrastructure jobs and, more importantly, fee-based contracts (~RM569m). After a quiet 1H, pre-sales momentum is picking up with the launch of the first block for Sentral Suites in KL Sentral. 15 September 2016 Analyst Mak Hoy Ken +60 3 2171 0508 [email protected]Performance 1M 3M 12M Absolute (%) (2) 21 20 Rel market (%) (1) 18 18 Source: Bloomberg Market data Bloomberg code MRC MK No. of shares (m) 2,080.2 Market cap (RMm) 2,662.7 52-week high/low (RM) 1.48 / 1.03 Avg daily turnover (RMm) 3.5 KLCI (pts) 1,661.39 Source: Bloomberg Buy Price RM1.28 Target price RM1.60 (from RM1.56) Valuation Target price (RM) 1.60 Methodology NAV Key assumptions WACC for property (%) 9 WACC for EDL (%) 7 Discount to NAV (%) 35 Source: KAF
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Produced by KAF-Seagroatt & Campbell Securities Sdn Bhd Important disclosures can be found in the Disclosure Appendix
MRCB
Brimming with potential We re-initiate coverage on MRCB with a higher TP of RM1.60 (35% discount to
NAV). 2017 will be a lift-off year for MRCB, as the group moves from optimizing its
balance sheet to the execution of a strong pipeline of NAV-accretive deals.
Trading at a steep 48% discount to its NAV, the stock is also an excellent election-
theme play amid a rejuvenated orderbook and improving balance sheet strength.
Leveraging its early success with KL Sentral, MRCB is set to elevate itself as a premier transport-oriented developer (TOD) following several NAV-accretive landbanking deals in the Klang Valley and Penang with immediate development potential – i.e. Kwasa Sentral, KL Sports City, Cyber City Centre (CCC) and Penang Sentral. The emphasis is on railway accessibility and connectivity in urban areas and the city centre to drive inward migration and end-user demand. MRCB is also exploring the creation of property funds/strategic tie-ups with select government-backed or private institutional investors to part-fund its projects. This has already started with the entry of the EPF as an 80% stakeholder in Phase 1 of KL Sports City for RM421m (~28 acres), with MRCB holding the balance 20%.
Restoring its balance sheet health
As at 30 June 2016, MRCB’s net gearing stood at 109% (net debt: RM2.7b) vs 190% in FY12. After taking into account proceeds from the second tranche of its placement exercise (RM220m) and disposal of Menara Shell to 31%-owned MRCB Quill REIT (MQREIT MK, RM1.24, Buy) for RM640m, we project MRCB’s net gearing to come down to 73% by year-end (pro-forma target: 71%). Further out, we expect more asset monetization moves by MRCB to lift its balance sheet. Capital locked-up in its investment properties will be recycled into MQ REIT; Menara Celcom and Ascott Sentral may be the next in line. Likewise, MRCB is looking to sell EDL concessions (debts: RM1.1b or ~35% of MRCB’s total debts). Moving into FY17F, our net gearing ratio is projected to rise to 121% vs 73% for FY16F after assuming close to RM1b in funding commitments for a 70% stake each in Kwasa Sentral and CCC (Phase 1). However, if the sale of EDL and Menara Celcom materializes, this could bring down our net gearing again to 53% (pro-forma target: 45%).
Key overhang removed – new Bumiputera status opens more doors Having met the Bumiputera shareholding requirements (36%), MRCB has solidified its position as one of the largest Bumiputera-controlled public-listed entities with a sizeable orderbook (RM5.3b) and property landbank (GDV: RM50b). This will pave the way for MRCB to bid for more contracts under the Bumiputera category. Some RM36b representing 46% of the combined value of RM79b for 12 mega infrastructure projects have been earmarked for Bumiputera contractors (e.g. MRT 1 & 2, LRT 3, KL 118, WCE, BBCC, Asia Aerospace City). Its construction unit have been rejuvenated, with a newfound focus on higher-margin infrastructure jobs and, more importantly, fee-based contracts (~RM569m). After a quiet 1H, pre-sales momentum is picking up with the launch of the first block for Sentral Suites in KL Sentral.
Recommendation structure Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price and only reflects capital appreciation. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%.
Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months.
Market or sector view: This view is the responsibility of the strategy team and a relative call on the performance of the market/sector relative to the region. Overweight/Underweight implies upside/downside of 10% or more and Neutral implies less than 10% upside/downside.
Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ from 'fair' value.
Disclaimer This report has been prepared solely for the information of clients of KAF Group of companies. It is meant for private circulation only, and shall not be reproduced, distributed or published either in part or otherwise without the prior written consent of KAF-Seagroatt & Campbell Securities Sdn Bhd.
The information and opinions contained in this report have been compiled and arrived at based on information obtained from sources believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made by KAF-Seagroatt & Campbell Securities Sdn Bhd as to the accuracy, completeness or correctness of such information and opinion.
Any recommendations referred to herein may involve significant risk and may not be suitable for all investors, who are expected to make their own investment decisions at their own risk. Descriptions of any company or companies or their securities are not intended to be complete and this report is not, and should not, be construed as an offer, or a solicitation of an offer, to buy or sell any securities or any other financial instruments. KAF-Seagroatt & Campbell Securities Sdn Bhd, their Directors, Representatives or Officers may have positions or an interest in any of the securities or any other financial instruments mentioned in this report. All opinions are solely of the author, and subject to change without notice.
Dato' Ahmad Bin Kadis Managing Director KAF-Seagroatt & Campbell Securities Sdn Bhd (134631-U)