KUCHING: Malaysia Resources Corporation Bhd (MRCB) is transforming into a credible government-linked property/contractor with its strong KL Sentral franchise with solid earnings support to boot.
GLC: MRCB is transforming into a strong government linked contractor with strong earnings and its KL franchise.
HWANGDBS Vickers Research Sdn Bhd (HWANGDBS Vickers) said in its research report that this was a transformation from the high-beta leveraged proxy company with historical patchy earnings delivery.
However, with three quarters of above average earnings delivery and three-year earning per share compounded annual growth of 40 per cent, MRCB was seen in the right direction.
On the other hand, there was newsflow that the Employee Provident Fund (EPF) and the government will form a joint venture to develop the 3,400 acres of the Rubber Research Institute Malaysia land in Sungei Buloh derailing EPF’s conditional take over exercise.
This was because MRCB share price was clearly above RM1.50 per share on the expectation that it would be formally appointed as the master developer of this land.
Nonetheless, EPF’s market move showed that it was being serious in seeing this conditional take over materialize thus solidifying its shareholding prior to a formal material announcement. As a result, this would inject some of its lucrative assets into MRCB.
The research house assumed scenarios that were mutually exclusive, on the condition that MRCB would be successful in clinching one piece of government land.
In all scenarios, it used a discounted cash flow of development profits using a discount rate of 10 per cent to estimate the net asset value accretion to the previous base case of some-of-parts value of RM1.80 per share.
Furthermore, in all scenarios, it was assumed that MRCB and EPF would have 50:50 shares.
Scenario one assumed 25 acres in KL Sentral/Brickfields in which the research house viewed to be the highly probable scenario since it would ensure the continuity and uniformity in KL Sentral where MRCB had carved out a successful franchise.
It was assumed that the parcel of land would have a conservative plot ratio of eight times and an average selling price of RM700 per square feet that would translate into a gross development value of RM4.9 billion.
Furthermore, based on the estimated land cost of RM800 per square feet, the construction costs of RM350 per square feet and other interest and holding cost, the breakeven cost was expected to be RM596 per square feet.
As a result, the some-of-parts value would rise to RM2.20 per share from RM1.80 per share. This assumed a gross development value of RM4.9 billion, development duration of eight years, pretax margins of 15 per cent and the payment of the land through rights issue’s proceeds.
One the other hand, scenario two assumed additional 50 acres of Jalan Cochrane land within the central business district of Kuala Lumpur where the train station for the third LRT line would eventually take off.
The research house assumed a plot ratio of eight times and average selling price of RM750 per square feet that would translate into a gross development value of RM10.5 billion.
Based on estimated land cost of RM150 per square feet, construction costs of RM400 per square feet and other interest and holding cost, the breakeven cost was expected to be RM555 per square feet.
The some-of-parts value would rise to RM2.20 per share from RM1.80 per share assuming development duration of 12 years, pretax margins of 15 per cent and the financing through proceeds from the rights issue.
On the other hand, scenario three assumed an additional of 25 acres in Ampang Hilir with a plot ratio of just four times and average selling price of RM650 per square feet that would translate into a gross development value of RM2.3 billion.
The lower density was due to the height restriction in this area where the majority of embassies reside. Nonetheless, this area had a certain amount of pricing power to compensate for the lower plot ratios.
Based on estimated land cost of RM200 per square feet, construction costs of RM350 per square feet and other interest and holding cost, the breakeven cost was expected to be RM530 per square feet.
As a result, some-of-parts- value would rise to RM1.95 per share from RM1.80 per share. This also assumed development duration of five years, pretax margins of 15 per cent and proceeds from its rights issue to be used to finance the land purchase.
The last scenario assumed an additional 3400 acres of Rubber Research Institute of Malaysia Land in which MRCB was likely be appointed the master developer for this whole parcel of land and receive fee income.
There was a myriad of scenarios on how the exercise would be structured. One was different joint venture percentages for MRCB and EPF where certain parcels of land could be carved out to be purely for MRCB, or one parcel of land could potentially go to a pool of developers and EPF could be master developer for certain parcels.
It was understood that there were nine land titles to be transferred to a trustee before the masterplan bounded all the titles into one master title. In this scenario, it was assumed that the government would divide this large 3,400 acre of land to six developers or joint venture companies.
Hence the joint venture between MRCB-EPF would end with 567 acres. The research house assumed a conservative plot ratio of just three times and average selling price of RM300 per square feet that would translate into a gross development value of RM18 billion.
This piece of land that would also have an LRT station from the third line had an estimated land cost of RM10 per square feet, construction costs of RM180 per square feet and other interest and holding cost, that would create a breakeven cost of RM243 per square feet.
The some-of-parts value would rise to RM2.70 per share from RM1.80 per share with an assumption of duration of 20 years and pretax margins of 15 per cent.
It was reported that, earnings in 2010-2011 would be ramped up as construction progresses at KL Sentral for Lots A, 348, E and G were reaching the 10 per cent mark for meaningful earnings recognition and its RM1.5 billion external order book.
Furthermore, the cyclical nature of the earnings recovery was sustainable given the overall low cost and construction progress being on schedule.
As a result, the research house raised the target price of the company to RM2.25 per share based on the revised some-of-parts value. EPF’s involvement in the 3,400 Rubber Research Institute of Malaysia land would have exponential spill over effects on MRCB.