MRCB - Morphing into GLC property proxy

Property proxy. Property profits should expand at 3-year CAGR of 40% and contribute 63% of FY13F EBIT (vs 35% in FY10) anchored by two launches: Lot B strata offices (GDV RM1.2bn, ASP RM1,250 psf, 60% sold) and Lot D (GDV RM1.4bn, ASP RM1,100 psf, launch end-2011). Lot B saw repeat en bloc purchases from Korean fund, Daol, of 24% of NLA. At Lot D, the successful launch of St Regis Residences (ASP RM1,800 psf; c.50% sold) should be positive for adjacent Lot D. With 12 acres left to develop in KL Sentral, the swap arrangement with the government involving RM129m of construction works on 5-acres of land in Brickfields (implied land cost RM590psf) will ensure
continuity there. We estimate SOP accretion at RM0.20/share based on DCF (RM1bn GDV, 6x plot ratio, and 25% margins).

Visible construction flows. Our RM700-800m p.a. new order assumptions FY11-FY12 seem conservative given the healthy pipeline of jobs - LRT, MRT and River of Life. The
media continued to highlight that MRCB is the front runner for the LRT extensions (Ampang line) worth RM800m. The project will be awarded very soon. We expect MRCB to capitalise on its role as PDP for the River of Life Project, with Phase 1 (first 10.7km) worth RM3.3bn with some visibility on contract awards by end-2011

Raised FY12-13F EPS by c.20% after factoring in launch of Kia Peng condos (GDV RM324m), Batu Feringhi (GDV RM184m) and Setapak (GDV RM1.5bn). We assumed they
would be launched in 2012 with 18-20% margins. Our forecasts exclude Penang Sentral (RM2bn GDV) and the 5 acres in Brickfields.

BUY, TP nudged up to RM3.25. MRCB is poised for a rerating with more sustainable earnings delivery and visible share price catalysts. With the upcoming GE, it is also an ideal proxy, as a GLC-linked contractor and developer. We nudged up our target price to RM3.25 after imputing higher earnings and rolling over valuation base to 2012, although the full impact was offset by higher debt levels.