THB believes Malaysian Resources Corp’s track record in LRT3 in addition to other rail projects such as Mass Rapid Transit (MRT) 2 may enable it to clinch opportunities from upcoming rail-related projects – Penang LRT and MRT3.
LRT3 recap, MRC, in a previous JV with George Kent, was initially appointed as project delivery partner by Prasarana
Malaysia for the 37km LRT3 in Sep 2015 with an initial budget of MYR9bn (excluding land acquisition costs) at that time. This MYR9bn amount did not include other costs such as PDP fees, other consultant fees, operational and overhead costs, as well as interest payments during construction, which resulted in cost overruns at MYR31.7bn. However, in Jul 2018, the LRT3 project cost was reduced by c.47% to MYR16.6bn. Post cost reduction, the PDP model was restructured to a fixed-price contract in Nov 2018 – MRC-GK JV as a turnkey contractor – worth MYR11.9bn.
Later in Sep 2021, MRC took over GK’s 50% stake in the JV company formed to construct LRT3 for MYR53m – effectively recognising 100% of the project from then onwards. The LRT3 project was c.60% completed – which meant that MRC had c.MYR4.7bn of billings to recognise until completion. As of the end 3Q23, line-wide progress of the LRT3 construction stood at c.86.5%. It is estimated to be completed by Mar 2025. Therefore, the house estimates the 13.5% balance of works for the LRT3 or c.MYR1.6bn of billings (9.8% of orderbook) and a MYR48m PAT (assuming a 3% net margin) to be recognised by MRC over 3Q23 until 1Q25.
Potential catalysts for LRT3. Recall: LRT3’s cost reduction in Jul 2018 entailed the cancellation of six stations. Prasarana Malaysia had approached MRC in 4Q22 regarding the potential reinstatement of the five previously axed stations (Persiaran Hishamuddin station not included) that could be worth MYR1bn.
The house also favours the stock for its strong orderbook-to-revenue cover ratio of >5x and a sizeable land bank of 1,153 acres (MYR33bn GDV) – providing ample supply of land for future projects.
The stock is trading at a 0.45x FY24F P/BV, below -2SD from the KL Construction Index’s 5-year mean P/BV. This is undemanding in our view, in light of the aforementioned points, and – as such – our BUY call. Key downside risks include a slowdown in the property market and sluggish project rollouts
