MRCB - OUTPERFORM - 12 March 2012

Stock Name: MRCB
Company Name: MALAYSIAN RESOURCES CORP

Research House: KENANGA

Price Call: BUY

Target Price: 2.71

The Prime Minister, Dato' Seri  Najib has announced that the government willreview the toll collections for Eastern Dispersal Highway (EDL) and it isexpected  to come up with a solution in 2weeks' time. It was also reported that the government is currently looking at technicalissues with regards to the EDL toll collection with the possible abolishment oftoll collection. The toll charge for Class 1 (Cars) had previously been set at RM6.20and tolling to start on 1st July 2012 until 2040 as stipulated in theConcession Agreement (CA). We are not sure on the outcome on the government'sreview decision above at this juncture and a total abolishment or lower tollrates are some of the possible solutions, similar to the decision made for theGrand Saga highway recently. Nonetheless, we note that EDL's CA will somewhatcushion the impact of any toll rate revision via its toll rate mechanism. Themechanism seems to protect both the government and the concessionaire in (1)determining toll rate hikes and (2) toll collection benchmarks via trafficgrowth. We are maintaining our OURPERFORM recommendation on MRCB with a lowerTarget Price of RM2.71 (previously RM3.14) based on its RNAV. We have loweredour FY12 earnings due to the bleak outlook in its property and constructionearnings in FY12 following some delays in its current projects.

Emergence ofpolitical risks.  We see this news asthe emergence of political risk for MRCB and construction sector, which relatesto the highly expected General Election (GE) due in this year. Although thegovernment's decision has yet to come, the market we reckon will perceive thisnews as negative to MRCB. We think that the government is likely to reduce orto abolish the toll collection due possibly to the GE factor. 

Neutral impact?  The toll rate compensation and revision for EDLis calculated differently as compared to other toll concessions via its toll rate mechanism to determine the toll ratehike, i.e. the Agreed Toll Rate (ATR). In short, if the actual toll collectionis higher than the budgeted toll collection, EDL's next toll rate hike would becapped at the actual toll collection rates and vice versa. EDL is entitled toincrease its toll rate at the quantum of 10% for every 3 years. The CA providesa clause for compensation if the government delays or announces lower tollrates as compared to the ATR. We think that the impact will be NEUTRAL for MRCBshould the government abolish or reduce tolling at EDL.  

Lowering downproperty & construction earnings. We have lowered our FY12 earnings by 43% as the management has guidedfor an unexciting reporting period for MRCB in FY12 due to delays in itsproperty and construction projects.

Maintain OUTPERFORMwith a lower Target Price at RM2.71 based on RNAV.  EDL is valued at RM0.14sen in our RNAV basedon DCF valuation with WACC at 8%.

Source: Kenanga