By ANIS HAZIM/ Pic By MUHD AMIN NAHARUL
MALAYSIAN Resources Corp Bhd (MRCB) has set ambitious long-term environmental, social and governance (ESG) goals and is looking to achieve its carbon neutrality by 2040.
Hong Leong Investment Bank (HLIB Research) analyst Edwin Woo said MRCB had revamped its governance and incentives structure to achieve its ambition.
“To implement sustainability measures, MRCB has established a dedicated governance structure. At the core is its sustainability management committee charged with ensuring objectives are met, reviewing the effectiveness of initiatives and making recommendations to the board on material sustainability issues,” Woo said in a note yesterday.
According to the analyst, MRCB is incorporating sustainability key performance indicators into performance review which should incentivise the transition to achieve its long term ESG goals.
In addressing the carbon emissions, the group aims to reduce its carbon, energy, waste and water intensity by 1% in 2022 and strives towards carbon neutrality by 2040.
“To aid this pathway, MRCB has developed five and 10-year roadmaps as an internal guide. Given the nature of the construction supply chain, MRCB would have to rely on offset initiatives in achieving its carbon-neutral goal,” he said.
Notably, the environmental initiatives are still young and tangible improvements would require a gestation period.
On gender equality, MRCB’s average gender pay gap is 3.5% compared favourably with the national average of 29.1%.
“We consider this to be an achievement as the talent pool in the construction sector is usually male dominant. However, this does not extend to its board of directors (BOD) with only one female representative on the board.
“We note that its previous board composition saw female representation at 30% which is consistent with best practice, but recent reshuffling due to retirements has brought about this change,” he stated
Meanwhile, the group appointed recruitment agencies via tender or invitation for its foreign labour based on their past track records.
“MRCB strictly adheres to the procedures and relevant regulations involved in hiring foreign labour. It ensures the provision of Centralised Living Quarters and other welfare facilities at its project sites and is in full compliance with Workers’ Minimum Standards of Housing and Amenities (Amendment) Act 2019 (Act 446),” he noted.
To address excessive dependence on foreign labour over the longer term, MRCB will increase the usage of modular construction which is beneficial to reduce construction labour requirements by 30%, reduce noise, dust and other forms of pollution, and lower work defects.
“Such a move is in keeping with the government’s long-term plan to reduce foreign worker dependence to 15% disclosed in the recently announced 12th Malaysia Plan,” he said.
However, HLIB Research views foreign worker dependence as a sticking point as the sector faces structural difficulties attracting local labour due to its dirty, dangerous and difficult.
MRCB has also run an equal opportunity employment programme, [email protected], which provides employment opportunities to prison inmates and aims to absorb them upon release.
“Around 156 inmates have joined the programme since its launch in 2019. During this pandemic, MRCB has donated RM1.5 million in the form of food baskets, personal protective equipment and other essentials to various vulnerable groups,” he noted.
The analyst acknowledged that MRCB’s Covid-19 community relief contributions are noticeably better than some sector peers under his coverage.
On the other hand, the group’s independent directors (ID) constitute three over eight, slightly below Malaysia Code of Corporate Governance’s best practice of 50%.
“Management is seeking to increase board representation from within its industry which we believe could be tricky given challenges imposed by best practice ID composition (more than 50%) and competitive reasons.
The analyst stated that MRCB’s independent non-executive chairman has served on the board since 2005, and in 2018 was re-designated as independent from non-independent.
“In assessing independence, MRCB engages KPMG and the above redesignation was also put out to a two-tier voting process prior to implementation. Nonetheless, Bursa’s recent proposed amendments to limit IDs to a cumulative 12-year limit (board tenure) may require some changes on MRCB’s part,” he added.
Besides, since peak revenue in 2017, BOD compensation has declined roughly with revenue at -64% and -58%, respectively.
“We believe this indicates remuneration policy in line with performance expectations. During the pandemic, MRCB implemented a 30% voluntary pay cut for its board and senior management while maintaining salaries for remaining employees,” he said.
He also sees the trend of improvement in declining share for non-audit fees paid to the group’s auditor, PWC, which had received 17% in 2020 from 64% in 2016.
Moreover, MRCB has consistently maintained its position in the index over the past three years with scores improving from 1.7 to 2.7 in 2020.
“Within our sector coverage, MRCB is a standard-bearer being the only stock included as a constituent. Nevertheless, this could be due to its classification as a property counter under FTSE as we note construction stocks are absent from the index,” he further said.
LIB Research maintained its ‘Hold’ call with an unchanged sum of parts-driven target price of 43 sen based on the financial year of 2022/2023 price-to-earnings multiple of 26.8 or 25.5 times.
“The stock lacks catalysts beyond the reopening and weak execution may pose a continued drag on near term performance while its low price-to-book trading multiple of 0.4 times might cushion further downside,” he noted.
He added that the catalysts will be the Mass Rapid Transit Line 3 rollout, while the downside risks will be the Covid-19 setbacks, political uncertainties and materials cost pressure.