MRCB to benefit from Budget 2019, upgraded to Add at CIMB Research

A mutual termination of the 100%-owned Eastern Dispersal Link (EDL) concession appears under way

KUALA LUMPUR: CIMB Equities Research considers Malaysian Resources Corp Bhd (MRCB) as a beneficiary of Budget 2019 and upgraded it to Add from Reduce.

It said on Monday one of the key infra takeaways relating to tolled highway concessions is the setting aside of RM1.3bil as full compensation to MRCB for the abolishment of toll collection on the 100%-owned Eastern Dispersal Link (EDL, 8.1km, 34-year concession) and the termination of EDL’s concession agreement (CA).

“This news is positive and is long overdue, particularly clarity on the full settlement sum, which has never been officially revealed. 

“The new government’s acknowledgement of the RM1.3bil compensation to MRCB, in our view, should revive the long-drawn-out negotiations on EDL’s mutual termination agreement (MTA), which commenced 10 months ago in January 2018. 

“With this new milestone, we believe there is a fair chance that a final resolution/agreement on the EDL could be expedited and reached by end-2018,” it said.

CIMB Research said the MRCB’s 2017 annual report revealed the carrying amount of EDL’s service concession asset (SCA) was RM1.1bil.

 It was stated that in the event of a compensation arising from the MTA, MRCB expects, at the minimum, to fully recover the RM1.1bil carrying amount as per its legal rights under the CA, which was signed on June 26, 2007. 

EDL’s 34-year toll concession ended on Dec 31, 2017. Since then, EDL has generated zero revenue for MRCB.

“We understand that the RM1.3bil cash compensation value for the EDL as announced in Budget 2019 will be utilised for the full settlement the RM1bil debt associated with EDL comprising the RM845m Senior Sukuk and RM199m Junior Sukuk (semi-annual payments, currently classified as current liabilities) and the interests accrued. 

“The impact from EDL’s compensation payment will therefore be NPV neutral to EDL at best, in our view, but will strike out 26% of non-recourse debt at the MRCB level,” it said.

CIMB Research retained its FY18-20F EPS pending the actual announcement by the government and MRCB regarding the resolution of the EDL MTA and more clarity on the timeline and the payment scheme of the settlement sum. 

“Upgrade from Reduce to Add with a higher TP of 90 sen, pegged to a lower 20% discount to RNAV (30% previously).

“Our call is more trading-oriented ahead of official newsflow on the EDL, which will serve as the stock’s key catalysts. A key risk to our call is a delay in the EDL settlement,” it said.