News

To dispose its 30% stake in Duta-Ulu Kelang Expressway (DUKE) to Ekovest Bhd for RM228m cash.

Entered into a HoA with QCT to dispose Platinum Sentral for RM750m in return for RM486m cash and RM264m new QCT units at an issue price of RM1.32/unit.

In the same vein, MRCB will acquire 41% stake in QCT’s REIT manager at 10x P/E for RM7.2m cash.

Highlights

Lower DUKE valuation… DUKE’s proposed disposal value of RM228m is 21.9% lower than our ascribed valuation as the highway is still in the early growth stages.

DUKE drains cash… The highway will now undergo Phase 2 extension worth RM1.18bn which will further constraint DUKE’s future cashflow, requiring additional funding. Hence, we agree with MRCB’s decision to sell DUKE and redeploy its cash into its core property development business.

How Platinum is done… The RM486m cash portion can be fully settled through debt without breaching REIT’s maximum borrowing threshold ratio of 50% of Total Asset Value.

Averting Platinum MGO… With additional 200m new QCT units, MRCB will emerge with a 33.9% stake, effectively triggering a MGO. To avert this situation, we believe that an additional 10% private placement will be issued by QCT.

Gearing improvement… MRCB net debt will improve to RM1.94bn from RM2.92bn, with net gearing improving to 92% from 175% based on 3QFY13’s numbers.

Yield accretion?... We estimate Platinum Sentral’s yield to be ~5.5%. Although QCT’s yield is estimated at 6.4%, we believe that the proposed exercise will eventually be yield accretive for QCT as Platinum Sentral has high occupancy rate with long-term rental tenure and quality anchor tenants. Moreover, with MRCB emerging as the largest shareholder, its interests will also be aligned with QCT’s existing shareholders.

Risks

Execution risk; Regulatory and political risk; Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Unchanged, pending conclusion of the deal.

Rating

BUY

We remain optimistic that the new management will be able to turnaround MRCB’s operations and positive on the degearing exercise. Moreover, QCT will provide an avenue for future degearing given MRCB’s upcoming list of assets while QCT has the potential to become one of the largest REIT in the country. Hence, we maintain our long term BUY call.

Positives: (1) Success in acquiring PJ Sentral land; (2) New construction contract wins; (3) Acquiring strategic land banks

Negatives: (1) Concerns over projects execution and property take-up rates; (2) Delays by the Government on EDL; (3) High net gearing levels; (4) Short-term earnings dilution arising from share swap with Nusa Gapurna.

Valuation

Due to Duke’s lower valuation, our TP for MRCB has been reduced by 1.9% to RM2.02 (see Figure #4). Potential valuation upside from the QCT deal has not been factored as it will take some time before the exercise is concluded.

Source: Hong Leong Investment Bank Research - 30 Jan 2014