News

The High Court has dismissed PKNS’ claim against Nusa- Gapurna and MRCB for the 70% stake in PJ Sentral. The High Court has also declined to consider a temporary injunction to prevent the sale.

Highlights

POSITIVE outcome… Following the court verdict, MRCB may now proceed to acquire Nusa-Gapurna’s 70% stake in PJ Sentral. The 9.85 acres land refers to Lot 12 and is part of the overall PJ Sentral Garden City development. It is strategically located at the heart of Petaling Jaya with a potential GDV of RM2.55bn.

We are POSITIVE at the judiciary outcome as it will provide continuity of development launches for MRCB instead of relying on KL Sentral for development profits.

Earnings outweigh dilution… The acquisition of PJ Sentral Lot 12 will see the issuance of an additional 108.8m new MRCB shares and 31.1m new MRCB warrants. Hence, diluting the existing 1.65bn share base by 6.6% to 1.76bn shares.

However, we believe that the dilution impact will be mitigated by the potential earnings growth from the new development profits which has already seen two tower blocks being leased out to MBSB and MyIPO.

Appeal by PKNS?… We do not discount the possibilities of an appeal filed by PKNS against the latest judgement. Hence, we believe that MRCB will be seeking a win-win situation with the State Government.

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. 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; (3) Delays by the Government on EDL; (4) High net gearing levels; (5) Short-term earnings dilution arising from share swap with Nusa Gapurna.

Valuation

Target Price maintained at RM2.02 based on Sum-of-Parts valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 28 Feb 2014