Disposal of Menara Shell allows MRCB to unlock value

Malaysian Resources Corp Bhd July 1 (RM1.05)

Reiterate market perform with a lower target price (TP) of RM1.20: Malaysian Resources Corp Bhd’s (MRCB) wholly-owned subsidiary, 348 Sentral, has entered into a conditional sale and purchase agreement with MRCB Quill REIT (MQREIT) for the disposal of Menara Shell, together with a 5-storey podium and a 4-storey basement car park, for a total cash consideration of RM640 million. This will allow MRCB to unlock the value of its assets and to manage the group’s borrowings.

We are positive on this news, due to the positive impact on the group’s earnings and balance sheet. Out of the purchase consideration of RM640 million, RM458.4 million is expected to be used to lower MRCB’s gearing in financial year 2016 (FY16) to 1.31 times (from 1.48 times) post payments for: i) a Bukit Jalil land swap; ii) the Cyberjaya City Centre development; iii) payment for Kwasa Land (RM700 million); and iv) completion of the 20% placement assuming the remaining 257 million shares placed out by year end at a 10% discount to the five-day volume-weighted average market price (VWAMP). MRCB will use part of the cash from the disposal of up to RM152 million to acquire an estimated 145 million shares in MQREIT, increasing its stake from 31.2% to 32.9% post MQREIT’s placement.

A net gain on disposal amounting to RM139 million is expected to accrete positively to earnings. As such, we have increased MRCB’s FY16-FY17 estimated core net profit by 148%-9% to RM122 million-RM63 million on: a) the net gain on disposal; b) lower financing cost; and c) we took the opportunity to increase our estimates of sales and marketing cost for more promotional activities due to the current weak environment. We are now regarding these investment property disposals as part of its core earnings due to the frequency of disposals.

The disposal is subject to approvals by shareholders, Bursa Malaysia and the Securities Commission Malaysia, and is expected to be completed by the fourth quarter of 2016 (4Q16). Management expects FY16 sales of RM1 billion from the launches of Sentral Suites (gross development value: RM1.4 billion), Bukit Rahman Putra (RM415 million) and Bandar Sri Iskandar (RM43 million) towards the second half of 2016. But we expect sales of RM600 million in FY16 as its launches are mostly in 4Q16, and given the weak property market, we would not be surprised if the group scales back the launches. MRCB’s remaining external construction order book is at about RM6.4 billion, coupled with about RM1.5 billion unbilled property sales, providing at least four years of earnings visibility.

We reiterate “market perform” with a lower TP of RM1.20 (from RM1.32), as we fully dilute our price-to-net tangible assets (P/NTA) valuations of the placement, employees’ share option scheme and warrants, combined with the positive impact from the disposal of Menara Shell on FY16 estimated NTA/share to 86 sen (from RM1.10), and apply forward P/NTA of 1.4 times (from 1.2 times), which is -1.5 standard deviation (SD) (-1SD previously) to the average six-year historical mean. The wider discount is applied as sentiment continues to weaken, and we expect the sector to de-rate further in the absence of near-term earnings-accretive catalysts.

Downside risks to our call include: 1) weaker-than-expected property sales; 2) lower-than-expected sales and administrative cost; 3) negative real estate policies; and 4) a tighter lending environment.

Additionally, MRCB has been given an undertaking to subscribe to MQREIT’s placement (of up to 407 million units at an issue price to be determined via book-building) for an aggregate value of no less than RM110 million, but up to RM152 million. Assuming a placement price of a 10% discount to MQREIT’s five-day VWAMP of RM1.15, MRCB would purchase 145 million shares (RM152 million or RM1.05 per share), increasing its stake in MQREIT marginally to 32.9% of the enlarged share base post placement (from 31.2% currently). — Kenanga Research, July 1

Sometimes, even the value of your home can be a mystery. Go to The Edge Reference Price to find out.

This article first appeared in The Edge Financial Daily, on July 4, 2016. Subscribe to The Edge Financial Daily here.