MRCB back on radar of investors

MALAYSIAN Resources Corp Bhd (MRCB) is back on the radar of investors. Its share price recently went into the top volume list and gained more than 7% in three days. Could it be a sign that something is brewing in the construction company?

Speculation on MRCB has gone on overdrive -- from the possibility of it seeing the emergence of a new shareholder to its government construction projects getting started again after delays due to the change in the administration at Putrajaya.

“At this price, there certainly should be buyers interested to take up a stake in MRCB,” says a trader.

Speculation on a new shareholder coming into MRCB is not really new, as it has persisted since the change in government on May 9. However, whether it happens or not will largely depend on the Employees Provident Fund (EPF).

The company was among the counters that were hit following the change in the government on May 9 this year. Its share price plunged as much as 44 sen or 44.7% since early May to 55.6 sen. Yesterday, MRCB closed up 4.22% to 74 sen with 95.64 million shares changing hands. The volume has increased compared to previous months.

At the last closing price, MRCB is currently trading at a trailing 12-month price earnings ratio of 10.3 times.

The largest shareholder in MRCB is the EPF, having almost a 35.5% stake in the company. Meanwhile, Gapurna Sdn Bhd, the private vehicle of Tan Sri Mohamad Salim Fateh Din, owns a 16.59% stake in MRCB.

Salim retired as MRCB’s managing director on July 2, after the change in government. He was succeeded by his son, Mohd Imran Mohamad Salim.

The sharp decline in the share price was partially due to the uncertainties surrounding the light rail transit 3 (LRT3) project that was at risk of being shelved due to escalating cost issues.

The LRT 3 project involves a 37-km line from Johan Setia in Klang to Bandar Utama, Petaling Jaya. It started off more than two years ago at a budget of RM10bil.

However, in July this year, Finance Minister Lim Guan Eng disclosed that the cost was some RM31.6bil. MRCB together with George Kent (M) Bhd is the joint project delivery partner (PDP) for the project, while Prasarana Malaysia Bhd is the owner.

The Finance Ministry (MoF) said that the project had to be done at RM16.6bil, which forced all parties to go back to the drawing board.

Sources say the LRT 3 project is expected to continue next month at a reduced cost.

It is said that there is no change in the PDP agreement and that all the contractors will be paid for work done and certified.

Meanwhile, for the remaining work, it is said that the contractors have been told to scale down their cost to meet the pricetag set by the MoF.

MRCB was not the only construction company that was badly hit following the revision of the mega-infrastructure projects.

“Since the 14th General Election (GE14), negative news flows have clouded the construction sector with uncertainties on job replenishment prospects for the next two years,” says Kenanga Research in a report.

For the medium term, the research house reckons that conclusion on the project cost for both the MRT2 and LRT3 will be positive for the construction sector, albeit at a lower sum as the negative news flow on the lower project cost has been priced in.

“Furthermore, contractors can continue with their work progress on the projects, thus reducing potential earnings risk,” it says.

Prasarana has seen changes since May 9 and the new team has to contend with contractors for the reduced scope of work and delays. The complaint by contractors is that they have not been paid for the last six months, there is no certain time line as to when the job will resume and they have to keep their workforce.

“The idling cost is going up every month for contractors,” says a source.

On March 30, the state-owned transportation company asked for an additional RM22bil worth of government guarantee for the construction and completion of the project. The Cabinet had, at a July 11 meeting, approved the continuation of the LRT 3 project but at a reduced cost of RM16.63bil.

The RM16.63bil figure is to include all project costs but not limited to work package contracts, land acquisition, project management, consultancy fees, operational and overhead costs and interest during construction.

In August, the government approved a bond issue for Prasarana, the proceeds which were used amongst others to pay salaries of its employees.

Work on the LRT 3 project has slowed down for several months. Sources say the LRT 3 project is expected to resume by next month.

Kenanga has maintained its “neutral” call on the construction sector due to the persisting uncertainties; especially on the cost review of the MRT 2 and LRT 3 projects as contractors are unable to continue to work on the projects full swing.

“Any further delay in concluding the cost will result in a higher operating cost for contractors arising from idling cost, coupled with the lack of direction in policy,” it says.

However, it says it would be a great opportunity for investors to bottom-fish, as most of the contractors have seen minimal recovery from the selldown post-GE14, which placed valuations at attractive levels.

Meanwhile, UOB Kay Hian points out that MRCB’s strong order book backlog of RM6.2bil could provide earnings visibility for its construction arm for the next three to four years, coupled with its modest reliance on the federal government’s related projects.

“Also, Putrajaya’s nod to proceed with the LRT 3 project should be viewed positively, as MRCB will continue to become the PDP, albeit the proposed ‘fixed contract’ mechanism may potentially contribute to lower earnings compared with pre-agreed PDP fees,” it says in a recent report.

It adds that the asset-monetisation exercise, including the disposal of the Eastern Dispersal Link and stakes in its Bukit Jalil land, is expected to strengthen MRCB’s earnings and balance sheet.