08 May 2012
HwangDBS Research expects MRCB's subsequent quarters to be weaker given maiden losses and inability to capitalise interest cost for the Eastern Dispersal Link, current orderbook of RM2.2bil and unbilled sales of over RM1.6bil provides solid earnings visibility over the next two to three years, target price RM 2.70
(MRCB opening stock price today (8.5.2012) was RM 1.69)
FIRST quarter 2012 earnings are expected to be strong, improving year-on-year (y-o-y) and quarter-on-quarter) q-o-q driven by property earnings from Q Sentral and Sentral Residences (about 60% sold or RM1.6bil sales revenue). There was minimal recognition in FY11.
However, we expect subsequent quarters to be weaker given maiden losses and inability to capitalise interest cost for the Eastern Dispersal Link (EDL).
We cut our forecast FY12-FY14 earnings by 19% to 28% to reflect this, imputing RM30mil start up losses for EDL for our FY12 forecast. EDL is supposed to start collecting toll in May but this would likely be deferred till post elections.
We expect compensation to be forthcoming especially with the outstanding sukuk worth RM1.3bil which has already been placed under negative watch by RAM Ratings. Given the sensitivity of toll rates, we do not discount MRCB selling the highway back to the Government.
This would be positive for its balance sheet while also proving useful in terms of raising capital for the Rubber Research Institute Malaysia (RRIM) project.
EDL is a 8.1km open toll system which links the Customs Immigration and Quarantine Complex (CIQ) and North-South Expressway via the Pandan Interchange in Johor Baru. The concession agreement clearly stated that the toll would be in the CIQ and tolling would commence this month.
The toll charge is meant to improve traffic at the “eastern” part of Johor Baru and the “dispersal” of traffic would improve traffic circulation in the city and to create a new “link” from the CIQ to the North-South Expressway by connecting the new road to the Pandan-Interchange and Bakar Batu Interchange.
The more recent newsflow on EDL is that the Government may impose a levy to all foreign-based vehicles going to Singapore using the EDL and it may buy back the highway from MRCB.
In either scenario, we expect the impact to be at least discounted cashflow-neutral for MRCB.
The stock is oversold, trading at 1.6 times forecast FY13 net tangible asset, below mean (range of 0.9 times to four times) and 11% above EPF’s offer price in March 2010. Current orderbook of RM2.2bil and unbilled sales of over RM1.6bil provides solid earnings visibility over the next two to three years.
We maintain our “buy” rating but lower our sum-of-parts-derived target price to RM2.70 by removing our valuation on RRIM.