Company Name: MALAYSIAN RESOURCES CORP
Research House: RHB
Malaysian Resources Corporation Bhd
(July 1, RM1.52)
Maintain trading buy at RM1.56 with a fair value of RM2.10: MRCB is buying out its partner in 348 Sentral, an office & service apartment development with a total gross development value of RM850 million in KL Sentral. It is paying RM105 million for a 60% stake in the project held by Gapurna (linked to businessman Datuk Mohamad Salim Fateh Din), thereby boosting its stake in the project to 100%.
At this price tag, 348 Sentral in its entirety is valued at RM175 million. This is a 60% premium to the valuation of the entire project of RM109.5 million when MRCB first bought a 40% stake, also from Gapurna, for RM43.8 million in December 2007. We believe the higher valuation is justified as: (1) the land value should have appreciated over the last two to three years; (2) the project is now 15% completed, via-a-vis just bare land when MRCB bought the initial 40% stake; and most importantly (3) Shell has been roped in as tenant for 60% of the office space for 15 years. Ceteris paribus, the acquisition will increase MRCB's net debt and gearing of RM430 million and 0.36 times as at March 31, 2010, to RM535 million and 0.43 times, which is still manageable.
Forecasts are maintained as rental income (the project will be held as an investment property) will only come in beyond our forecast period. Completion is expected by 4Q2012. Risks include: (1) new construction contracts secured in FY12/10 coming in below our target of RM500 million per year; and (2) rising input costs.
We maintain a trading buy. We are upbeat on the construction sector as we expect construction stocks to generally outperform the market over the short term, buoyed by news flow, particularly from the RM36 billion KL mass rapid transit (MRT) project and the RM7 billion Ampang and Kelana Jaya light rail transit (LRT) line extension project. For MRCB, additional kickers could come from the possibility of it bagging prime federal government land parcels in KL and Sungai Buloh. We estimate that the land parcels could enhance its valuation by RM1.2 billion or 86 sen per share. Indicative fair value is RM2.10 based on a sum-of-parts valuation. ' RHB Research Institute, July 1
This article appeared in The Edge Financial Daily, July 2, 2010.