MRCB 3Q09 surprises market

3Q09 surprises market

1. 3Q09 result exceeded market expectations, driven by construction earnings
2. New CEO promoted from within
3. Maintain BUY rating and RM1.80 TP (ex-rights).

3Q09 exceed market expectations. 3Q09 net profit was RM10m, bringing 9M09 net profit to RM22m. This was within our forecast but exceeded market expectations. 3Q09 earnings were driven by higher recognition of projects from its c.RM2bn construction orderbook such as EDL and Permai Hosptial in Johor. Construction margin was 5.5% vs 8.1% in 2Q09, but should normalize to 8-9% as EDL (13% completed) and KL Sentral construction projects (Lot A, 348, E and G) filter through. With no major launches in the pipeline (Lot D is scheduled for 2Q10), 3Q09 property earnings remained subdued at RM1m vs RM3m in 2Q09.

New CEO. MRCB has appointed Mohamed Razeek Hussain, aged 51, as CEO effective 1 December 2009. He is currently the COO of MRCB, which provides some assurance of his familiarity with the company. He has over 20 years experience in the property sector, having worked for Sime UEP, Land & General and E&O. Current CEO Shahril will be CIO of EPF but remain a director of MRCB.

Stronger newsflow. We expect strong newsflow for MRCB in the coming months, including (i) sale of Lot E comprising 5 office towers at a new benchmark price of RM1,200 psf or implied cap
rate of 6%, ( ii) chunky contract wins in 2010 related to LRT extensions and Bakun overland cables, and (iii) acquisition of valuable federal government land using proceeds from its
proposed rights issue.

Maintain BUY, RM1.80 TP. RM0.70 of our SOP value is supported by the KL Sentral franchise. The proposed rights issue is positive because it implies MRCB may be securing significant land deals and/or construction contracts. Besides the Jalan Ampang and Jalan Cochrane land, MRCB alluded to land banking of small and large pieces of land potentially in KL Sentral and adjoining its highways. The price of the 1-for-2 rights will be announced on 19 November.